Governor defends putting bank profits ahead of jobs

By Cameron Micallef

August 18 2020
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Reserve Bank of Australia governor Philip Lowe has hit back at suggestions that the central bank’s stance on negative interest rates is putting bank profits ahead of jobs.

Governor defends putting bank profits ahead of jobs

During the hearing on Friday, 14 August, conducted by the House of Representatives standing committee on economics, the head of the Reserve Bank was questioned on why the central bank refused to introduce negative interest rates.

Mr Lowe told the panel that the RBA has not completely ruled out the prospects of negative interest rates.

“I’ll make it clear that I haven’t ruled out negative rates. What I’ve said is that they are extremely unlikely. In a world that is so uncertain and so fluid, I don’t think it is prudent to rule it out, but it is extraordinarily unlikely,” Mr Lowe said.

However, the head of the central bank did note that a lack of profits for the financial sector is an issue for an economy.

“The first is that negative interest rates in most countries do impair the profitability and efficiency of the financial system and ultimately its ability to provide credit to the real economy, which is really important. We’re seeing this in Europe now,” Mr Lowe said.

“There are a lot of problems in the European banking system, but there are structurally low profits and it’s quite difficult for them to provide the credit to the economy that’s needed.”

He also pointed out that negative interest rates can have the opposite impact on an economy than what policymakers desire.

“A second negative I want to mention is that in many countries, there is increased concern that negative interest rates encourage people to save more, not spend more.

“Imagine I tell you that you can put $100 in the bank and in five years’ time I’ll give you back $95. That’s what negative interest rates mean. In response to that, we’re seeing in some European countries – and in Japan there is some evidence of this as well – that people say, ‘Because I’m going to get less from the bank in three or four years’ time, I have to save more,” Mr Lowe said.

In response, Labor MP and deputy chair of the committee Andrew Leigh accused the RBA of “putting bank profits ahead of jobs” by forgoing the benefits of negative interest rates on the exchange rate in fear of the impact on the financial system.

Mr Lowe replied: “I take issue with the contention that I’m putting bank profits before jobs. What I want to see is the credit supply process work effectively.

“[We] need banks that are profitable and that are willing to supply credit [to ensure the] credit supply markets are not distorted.

“My concern, at least at the moment, is that negative interest rates would make credit supply more difficult and that would hurt jobs.”

He concluded: “It’s not about bank profits, it’s really about jobs. My current view is that negative interest rates couldn’t help jobs, and arguably could make it worse.”

About the author

Cameron Micallef

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Cameron Micallef

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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