The monetary policy mess

One thing that can be said about trends in the cost of credit for business at present is that starkly different conclusions are being drawn from essentially the same data.

In the regular monthly statement explaining its stance on monetary policy yesterday, the Reserve Bank of Australia wrote that "business loan rates are below average, reducing debt-servicing burdens considerably".

The RBA made this comment in the context of the easing of monetary policy over recent months (and which was left unchanged yesterday) and the observation that "market and mortgage rates are at very low levels by historical standards".

But are they?

National Australia Bank in its half-year profit release last week disclosed that the average yield on non-housing loans in Australia (where the RBA's analysis is most controversial) fell to 7.8 per cent in the March 2009 half from an average of 8.9 per cent in each of the two preceding halves.

On housing loans, NAB said the average yield in Australia fell to 6.7 per cent in the March 2009 half from 8.3 per cent in the September 2008 half and from 7.7 per cent in the March 2008 half.

In its half-year profit ANZ last week disclosed that average yield on loans to Australian customers (both business and consumer) fell to 7.2 per cent in the March 2009 half year from 8.8 per cent six months before and from 8.3 per cent 12 months before.

Macquarie Group, which reports this data for the "group" rather than in the separate financial statements for its bank, said the average yield on loans assets (worldwide) eased to 7.6 per cent in the year to March 2009 from 7.7 per cent in the year to March 2008. (Macquarie did not publish half-yearly data.)

The counterpoint to these aggregate measures of yields on lending portfolios (and which reflect period averages and not current yields) is that bank managements say that cuts in actual business lending rates are slight at best.

NAB, for instance, has repeatedly confirmed its plans to lift the risk margin, and thus the actual interest rate paid, on its entire portfolio of business loans. Joseph Healy, who runs corporate and business banking at NAB, reiterated this in an interview published yesterday in the Financial Review. Healy did note that the bank was having difficulty pushing ahead with interest rate rises for business customers because of the discomfort in many parts of the portfolio. This fact only reinforces that for NAB's borrowers at least, rates are not falling.

The newspaper followed up that report today with an interview with Robert de Luca, head of corporate financial services at Commonwealth Bank, who noted that "if the environment continues to be difficult, and businesses' risk ratings get worse, margins will continue to be priced upward."

Steve Sargent, CEO of GE Capital in Australia and New Zealand, in a briefing last week said that the yield from business lending may have fallen by a notional amount only, only 50 basis points or so, over the period of the easing in monetary policy and the fall in target cash rate over the last seven months.

Other sources reinforce these themes.

David Gandolfo, president of the Commercial Asset Finance Brokers Association of Australia, in a letter to lenders published yesterday by Business Spectator, noted that there was a "reduced margin for risk and a prudent approach to credit" and complained "that banks are taking an excessively cautious attitude to small business, which is constricting trade."

The actual practices of lenders and the experience of borrowers, especially of business borrowers, is the real-world version of the transmission mechanism of monetary policy.

This makes it hard to see how the RBA can contend, as it did in its statement yesterday, that "the stance of monetary policy, together with the substantial fiscal initiatives, will provide significant support to domestic demand over the period ahead."

This only reinforces the thesis, advanced a month ago, that there is real tension between the Australian government and the Reserve Bank of Australia over monetary policy.

Most likely it will be Rudd and the comrades sorting out Stevens and the apostles, not the other way around.