The Reserve Bank (RBA) of Australia announced on October 7 that they would cut the official interest rate by 1% — the largest single cut since 1992 — in response to the US financial crisis.
The RBA decided on the interest rate cut in order to stimulate the banking sector and the economy more generally. However, the small gains made on the Australian Stock Exchange on October 7, directly after the rate cut was announced, were wiped out within 15 minutes of trading the next day, with a drop of 4.7% that brings losses on the ASX this year to a total of around 30%.
While the cut failed in its immediate attempt to strengthen the ASX, a cut in interest rates could significantly improve the situation for Australians with mortgages. However, the four major Australian banks — Westpac, the Commonwealth Bank, ANZ and the National Australia Bank — have said they will only pass on interest rate cuts of 0.8%, effective from mid-October.
The economic meltdown in the US, which is spreading to Europe, will impact most heavily on the poor, with house repossessions leading to increased homelessness while unemployment also dramatically increases as companies "downsize" to reduce costs. The internationalisation of trade means that Australia, despite its current resource boom, is not immune to the problems in the US market — as can be seen in the dramatic losses on the ASX on October 8.
Further exacerbating the impact of the current financial turmoil on working people is the current system of superannuation, which places workers' pension funds in compulsory investment schemes. This leaves workers' future survival exposed to this deep financial turbulence: people's retirement savings could vanish altogether.
When the so-called "sub-prime" mortgage crisis was first exposed in July, the financial repercussions wiped an average of 6.4% off the value of most superannuation funds, with some showing losses as high as 15%.
In this context, with the added pressure of ever-increasing food and fuel costs, banks passing on the full interest rate cut would be welcomed by working people suffering in the wake of economic downturn. If passed on, the cuts would lead to reductions on mortgage repayments and, as a result, generally a reduction in rents.
The 0.8% cut translates into a $273 reduction in monthly repayments on a $500,000 mortgage.
Sharan Burrow, Australian Council of Trade Unions president, has criticised the banks for not passing on the full value of the interest rate cut. She told the October 8 Australian that the four major banks had a combined after-tax profit margin of $15 billion a year and were in the top 20 of banks with the highest credit ratings worldwide.
In addition, Burrow noted that over the March quarter banks had increased their income from fees and commissions by 40% to $4 billion and that their income from interest had totalled $32 billion over the same period.
"The days of excessive bank profits at the expense of home buyers and working Australians are over. Banks need to lower their profit forecasts and cut their fees, charges and loan margin", Burrow said. "There should be no short-changing of working families from the banks today without transparent evidence and the requirement for a benchmark which will see those interest rate cuts flow to families struggling to pay their mortgages, to pay their bills on a weekly basis."
The banks should pass on the full value of the interest rate cut to consumers. The October 8 announcement by the Commonwealth Bank that it intends to buy Perth-based BankWest for $2 billion indicates the bank is in a strong enough financial position to pass on the full cut.
Banks play a crucial important role in the lives of working people: we need somewhere to store our money, somewhere to borrow from in order to buy our house. But the current financial situation raises questions about the whole system of a private banking sector run for profit, in which people's hard-earned life savings are gambled on increasingly volatile international markets.
The question of the nationalisation of banks has a precedent in Australian history. In 1947, then-PM Ben Chifley announced his Labor government's plan to nationalise the country's banks. The plan never went ahead, but 60 years later, as banks cry poor and claim they cannot afford to pass on the full 1% rate cut, they should be nationalised in the interest of the public. Superannuation funds could then be placed in a government trust rather than in the casino economy, which is obliterating the future incomes of millions of people.