Ethical Leadership & Economic Realities: Delving into Woolworths, Coles, and the Complexities of Australia's Rising Costs. (Part 4 and Final)

In our preceding article, we extensively examined the intricacies of the Australian housing sector, dissecting elements like the rental market, purchasing patterns, and stakeholders capitalising on the prevailing conditions. We unravelled the obstacles presented by a heightened rent-to-income ratio and an increased poverty rate, bringing to light systemic challenges impacting fundamental facets of livelihoods.

Furthermore, we scrutinised the intricacies of the housing realm, highlighting the necessity of rectifying the disparity between supply and demand to ensure enduring affordability. It became evident that governmental intervention, in conjunction with public participation, holds the solution to fostering a more equitable housing market accessible to all (Part 3).

In today’s article, we delve into the beneficiaries of the housing market, a vast topic with multifaceted dimensions. Today, our focus centres on the banking sector, recognising its pivotal role in shaping this domain.

However, before delving deeper, it is imperative to grasp the concept of "inflation”.

Inflation refers to the sustained increase in the overall price level of goods and services in an economy over time. As inflation rises, the value of your money decreases. The same amount of money buys you less over time. This can be especially noticeable for everyday purchases like groceries, utilities, and gasoline.

The RBA (Reserve Bank of Australia) plays a crucial role in managing inflation in Australia. When inflation rises, they use monetary policy tightening, primarily through raising the cash rate, to reduce the money supply and dampen demand in the economy. This helps bring inflation back down to their target range and promotes long-term economic stability.

This said, inflation and interest rates are interconnected. RBA uses interest rates to manage inflation and promote economic stability. By raising interest rates when inflation is high and lowering them when inflation is low, they aim to achieve a sustainable economic environment.

So the RBA's cash rate decision serves as a strong benchmark for the Big Four banks when setting interest rates. While they aren't compelled to exactly match the RBA's changes, they are heavily influenced by them due to market pressure, profitability considerations, and the need to remain competitive.

Therefore, the relationship between inflation and the Big Four banks' profitability is complex. While they can potentially benefit from some aspects of inflation, they also face significant risks. Their success depends on managing these risks effectively and navigating the economic environment created by inflation and the RBA's response.

As per IBISWorld data, the financial market revenue in Australia stood at $360.6 billion in 2023, generating a profit of $162.6 billion and boasting a profit margin of 45.1%. Notably, home loans contributed significantly to this revenue, accounting for $195.1 billion, equivalent to 54.1% of the total revenue.

The big four banks in Australia collectively commandeer $102 billion of the annual revenue in this sector, holding a combined market share of 28%. This substantial market dominance underscores their significant influence and power within the financial landscape.

Now, that’s called Power….

Australia's Big Four banks – Commonwealth Bank, Westpac, National Australia Bank, and ANZ – wield significant power beyond just managing your money. Their decisions can influence how much you spend and how much you keep.

One key way they do this is through interest rates. While the Reserve Bank sets the cash rate, the Big Four have some leeway in what they charge for loans and mortgages. Higher interest rates make borrowing more expensive, potentially leading consumers to cut back on discretionary spending or prioritise essentials a trend particularly relevant in the present circumstances.

The Big Four can also influence how easily you access credit. Stricter lending criteria can make it harder to get loans, potentially reducing spending on big-ticket items like houses or cars. Conversely, easy access to credit might encourage more spending but also lead to higher debt levels.

The Big Four's impact goes beyond just interest rates and loan approvals. Their financial health and stability can influence consumer confidence. If consumers worry about the banks' stability, they might be more cautious with their spending. Additionally, the types of loans offered can nudge consumers towards specific purchases, such as energy-efficient renovations or electric vehicles.

Is it ethical?

The ethical implications of the Big Four's influence are a matter of ongoing debate. While they play a vital role in the Australian economy, concerns exist about their potential to prioritise profits over consumer well-being.

I advocate for redirecting government resources from endeavours like the ACCC's 12-month inquiry into Woolworths and Coles pricing towards initiatives aimed at striking a balance between banks' profits and consumer well-being.

This can be achieved through regulatory measures, financial literacy programs, and the promotion of increased competition in the financial sector. These actions can contribute to cultivating an ethical and sustainable financial system that serves the interests of both financial institutions and the individuals they serve.

Moreover, by allocating a significant portion of citizens' income for discretionary spending into areas of their choice, we can empower Australians to enhance their quality of life and pursue their personal aspirations. This approach fosters individual autonomy and allows for a more tailored and fulfilling lifestyle for all citizens.

Just a thought…!