LIES, DAMN LIES, AND STATISTICS

On the 5 December the Reserve Bank of Australia announced that the interest rate will be reduced by 25 points, to 3%.  It took a few days for the effect to be felt but most major banks indicated, with various degree of bad grace, that some of the benefits will be passed on to the consumers; passing on the full reduction would have amounted to, as the chairman of the Westpac Bank put it  “.banks  ... subsidising the home buyers” (apparently,  the cost of borrowing offshore funds has gone up). It appears that the banks have no obligations to reduce the interest rates by the full amount or any part thereof.  They tend to do so, to be sure, because, well... because.. they are such good corporate citizens.

Even an economic ignoramus such as I am came to the conclusion that lower interest rates are good for the economy, good for the housing industry, and good for those who are paying off a mortgage.  Gail Kelly, Westpac Chief Executive, added to seasonal cheer by signalling that more good news can be expected early in the New Year.

It occurred to me that it would be interesting to look up what is happening in other parts of the world.  But before doing so, I felt a need to define some of the terminology used. So:

Cash Rate:  In Australia the Cash Rate is set by the Reserve Bank of Australia and applies to the interest paid by the banks to the RBA through the overnight money market. In the USA the Cash rate is set by the Federal Reserve Bank. Most countries have an analogous central banking authority to adjust and regulate the prevailing commercial interest rate in the country. Thus, the Cash rate presently in Australia, is 3%, as in Canada.

Prime Rate: The interest rate that commercial banks charge their most credit-worthy customers.

Variable Mortgage Rate:  Is the rate homeowners are charged. The interest rate is not locked in but “floats” depending on the prevailing rate.  The borrower has the option to pay off the loan at any time. The present variable rate in Australia is about 5.5%.

Term Deposit Rate: interest paid on maturity date for a specified amount of money deposited for a agreed period of time. Term Deposits generally carry a fixed rate of interest.

Real Rate of Interest:  Essentially, the variable rate adjusted for inflation.                                              

Bearing the above in mind, I put together a composite table, from various sources, none, I suspect, too reliable, such as the World Bank, others:  

Country	Federal or Reserve bank rate (where available)	Deposit rate	Average Interest rate	Non-performing loans to total gross loans, %	Real Interest Rate, 2011 Adjusted for inflation. )
Australia	3%	4.2% (var) 5%> fixed	5.6%	2.2% *	1.3% (current figure is expected to be slightly higher.)
Canada	1%	0.1%	4.75%	1.1%	-0.2%
China	6%	2.8%
* (Euro. Central Bank)	0.75%	NA	4%	3%	N/A
Japan	0.1%		1.88%		3.7%
UK	0.5%		5.00%		1.4%
USA	0.25%	1%	3.6%	4.7%	3%

Further digging showed that our banks in Australia are paying considerably more interest than banks in other countries which has resulted in a substantial growth of foreign currency deposits, i.e. foreigners keeping their savings or investments in Australia. Although the upside is considerable, the downside, in particular adding strength to the Australian dollar, is problematic.

The default rate, is small in comparison to other developed countries. Nevertheless when the present 2.2%, is compared to the 2007 figure which stood at 0.7%, it is an increase of almost three fold and I would think it is a cause for concern.

Overall we seem to be doing well. Is this because or despite our government?

And of course there is always the nagging problem of lies, damn lies, and statistics.