7th Question
Will the Royal Commission ask the Governor of the Reserve Bank if he agrees with Dr. Malcolm Edey's below responses to the Senate 'Economics Reference Committee', because it is contrary to the findings in LOAN RATE STICKINESS: THEORY AND EVIDENCE in June 1992 and empirical evidence in the USA, the UK and Australia over the subsequent 26 years:
"Dr Edey : Yes, the financial system works through competition. The basic wholesale interest rate is the cash rate, which we set, and then competitive forces will cause other interest rates to move up and down with the cash rate. That is the way the effect of policy is transmitted to the wider economy."
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Supporting Documented Evidence re 7th Question
1. Extracts from the Reserve Bank Research Discussion Paper
titled LOAN RATE STICKINESS: THEORY AND EVIDENCE - RBA 1992 (by Philip Lowe and Thomas Rohling) dated June 1992 informed that the Reserve Bank regulated lending interest rates until 1985 and post-deregulation lending interest rates, in particular Credit Card interest rates, did not fall in line with the Overnight Cash Rate, and when falls were passed on, it wasn't done quickly or completely, whereas when the Overnight Cash Rate increased, these increases were passed on by way of higher lending interest rate and quickly. Hence, Credit Card interest rates were particularly sticky when the Overnight Cash Rate fell, as Credit Card interest rates regularly remained 'stuck'.2. 'Background information re the increasing interest rate spread for Credit Cards' and Chapter 17 further explain the abovementioned RBA's Research Discussion Paper - LOAN RATE STICKINESS: THEORY AND EVIDENCE.
3. Below are extracts from page 21 of The Senate - Economics References Committee - Interest rates and informed choice in the Australian credit card market - Dec 2015:
'Up like a rocket, down like a feather': Credit cards and the RBA cash rate
3.6 Professor Valadkhani (Department of Accounting, Economics and Law, Swinburne University of Technology) provided the committee with research he had undertaken indicating that credit passed on 112 per cent of RBA cash rate increases (the full value of increases, plus 12 per cent), but only 53.7 per cent of rate cuts: but cuts were delayed by an average of two-and-a-half months. Professor Valadkhani has suggested this asymmetry is an example of the 'rockets-and-feathers' effect: credit card interest rates 'shoot up like a rocket' in response to RBA cash rate increases, but 'float down like feather' when the cash rate is decreased.4 This means that over time the gap between the RBA cash rate and credit card interest rates has grown, and consumers have been left paying higher rates of interest overall.
3.7 Professor Valadkhani took issue with the banks tendency to downplay the relevance of the cash rate to credit card interest rates:
"We do not have enough information about what their funding sources are. The argument they always make is: 'We cannot pass rate cuts on because our sources of funding are different—it is not just the cash rate; it is our external sources.' My argument to banks is: if that is the case, how come, when the cash rate goes up, you immediately lift your rates? You may have other external sources that are not related to the cash rate, but you increase your rates anyway. When the cash rate goes down, though, you resort to the argument of external sources.5"
3.8 CHOICE noted that despite a falling cash rate, average credit card interest rates had gone up for both standard-rate and low-rate cards in recent years. This was of particular concern to CHOICE, because:
…if you must have a credit card and you are on a low income that means you cannot pay off your balance every month, a low-rate card is the best option. So to see banks taking advantage of drops in interest rates to dip their hands deeper into the pockets of low-income consumers is of deep concern.6
4. Below is an extract from TREASURY SUBMISSION TO THE SENATE ECONOMICS REFERENCES COMMITTEE INQUIRY INTO MATTERS RELATING TO CREDIT CARD INTEREST RATES - 11 Aug 2015:
Credit card interest rates have been unresponsive to movements in the cash rate
"Despite a 2.75 percentage point decline in the cash rate since late 2011, credit card interest rates have remained high. The rates on ‘standard’ cards are currently around 20 per cent, while the rates on ‘low-rate’ cards are around 13 per cent (Figure 3). This has prompted concern that there is a lack of competition in the Australian credit card market."
5. Below is and extract from the Government response to the Financial System Inquiry - Improving Australia's Financial System - 20 Oct 2015:
"We will also be clear in the Statements of Expectations that regulators should explain in each annual report how they have balanced competition with other elements of their mandates."