The big banks are under pressure to pass on the full cut in interest rates to customers.

Critics of the RBA’s approach to interest rates have warned that Australia is moving into dangerous territory, with ever lower interest rates threatening to send the economy into a downward spiral.

Banking sector analyst Martin North, the founder of advisory firm Digital Finance Analytic, has called for a radical overhaul of monetary policy to create incentives for “real economic growth” that did not depend on the housing market.

“We have to change the landscape so that banks have a greater imperative and incentive to lend to the commercial sector — because that’s the sector that will generate real, long term growth in the economy,” Mr North told news.com.au.

“Without that we’re never going to get out of this doomed loop of ever lower rates, and we’re going to end up more like Japan.” That nation’s economic woes are so dire that negative interest rates are in force.

Mr North said negative interest rates were “a possibility” in Australia if the RBA did not change its approach.

“Once you get into this low rate environment, it’s hard to get back out of it,” he said.

“It is a really slippery slope, and once you slide down into it, it’s really tough to get back out of it.”

So what’s the solution? According to Mr North, there are certain levers that the RBA can pull to help boost lending to the commercial sector.

But this may not be popular with those Australians struggling to break into the property market; the approach involves making lending to households less attractive to the banks, and lending to businesses “much more attractive”.

“At the moment they have to hold more capital for every commercial loan than they would have to for a mortgage loan,” Mr North said.

“The banks like mortgage lending because it’s lower capital and therefore more attractive to them in terms of profitability.”

MAKING A MOTZA

The major banks have been raking in an extra $1.4 billion while deciding to keep about half the RBA’s latest 25 basis point interest rate cut for themselves.

NAB dropped its standard variable rate by 10 basis points, ANZ by 12 CBA by 13 and Westpac by 14 basis points.

Just like last time, they cited increased funding costs and capital requirements — and the need to “balance the needs of both customers and shareholders”— as the reason for failing to pass on the full benefits of the new cash rate, now at a historic low of 1.5 per cent.

So why are the banks being so stingy? Are they just the greedy scrooges we like to caricature them as? The answer seems to be, sort of.

“Of course they’re protecting their margins,” said Stephen Mickenbecker, Canstar’s group executive for ratings and financial services.

“They’ve had a few shocks coming at them with wholesale funding rates globally, but also the ‘too big to fail’ regulatory changes not only taking effect, but also coming towards them.”

Mr Mickenbecker said the banks had been able to soften the blow of their decision not to pass on the full cut, by announcing a 50 basis point hike to interest earned on two-to-three-year term deposits.

“They can mount the strong argument that they’re helping people, because the real squeeze in the last couple of years has been on retirees,” he said.

But Mr North dismissed the term deposit announcement as “a smokescreen” to the banks’ obsession with safeguarding profit margins and keep up with dividend payments, pointing out that there were many more households affected by mortgages rates than those with term deposits.

He said the banks were struggling to maintain dividends while under pressure from a complex web of regulatory capital requirements, a decrease in the volume of their business, and loan write-offs in the mining-heavy states.

While he agreed that older Australians were the hardest hit by low interest rates, Mr North said that many depositors shied away from term deposits because they needed ongoing access to their cash.

“A lot of these savers now are in the position where they haven’t got income coming in off their bank deposits,” Mr North said.

“They are really going to feel the pain and that means they’re not going to be able to spend going forward.”

He said these savers made up about a third of Australian households — the same proportion that have mortgages.

HOW TO BOOST GROWTH

A few extra basis points or $20 a month off the mortgage “isn’t going to fire the economy”, Mr North argued, so the idea of cutting rates to stimulate the economy was “flawed, if we forget about the other side of the equation”— “firing up” the commercial sector.

Griffith Business School economist Fabrizio Carmignani also argues that slashing interest rates was not a solution.

“This kind of monetary policy is not going to have much impact,” Professor Carmignani said. “It will have a very marginal impact on the economy.

“We can’t ask monetary policy to do much more. The government needs to stop being obsessed with debt and balancing the budget, and take a more expansionary approach.”

Prof Carmignani said a Kevin Rudd style economic stimulus program was needed to turn things around.

“We’re talking about an economic environment where inflation is low. This is an economy in contraction,” he said.

“Fiscal policy is the tool we need to take to the economy with increased expenditure and public spending ... The government has got to stop thinking about what the ratings agencies want and think about what the economy needs.”

He said Labor’s response during the height of the global financial crisis in 2008 — when millions of taxpayer dollars were poured into controversial school building, infrastructure and home insulation programs — was “an appropriate template”.

“In 2016, we wouldn’t need to spend as much but we could revisit that logic and invest more public money into an economy that needs revitalisation.”

dana.mccauley@news.com.au