Friday, August 15, 2008

It's on alright. The Reserve Bank says so.

The second-most senior official in the Reserve Bank has broken with tradition and revealed that an interest rate cut is imminent.

Normally secret, the recommendations that go before the Reserve Bank board are closely guarded in order to allow members to make decisions as they see fit.

But yesterday the Bank’s Deputy Governor Ric Battellino told a parliamentary inquiry that the bank was “in a position to respond on interest rates”.

“The Bank took the view that it had to take measures to stop inflation going higher,” he said.

“The aim was to slow down demand, to make it harder for businesses to widen their margins and to force businesses to start cutting their margins again. That has happened. That’s been successful.”

“We have asked households to cut back on their spending and I think it’s fair to say that households have responded very favourably.

“We set out to bring inflation back to the target range, and we are confident that we are on that path. And that’s why we are in a position to respond on interest rates"...

The admission pushed the Australian dollar down below 87 US cents within minutes. It hit a low of 86.70 before recovering to close just above 87.

Asked how the Reserve Bank could be preparing to cut its rates at time when it was forecasting inflation to climb to 5 per cent, the Deputy Governor said the Bank could not wait to see a fall in inflation before starting to cut, “because by then it would be too late”.

“The Bank’s policy has always been to be pre-emptive. We try to be pre-emptive when we start tightening and pre-emptive when it comes to easing. The Reserve Bank now finds itself in a position where it is able to think about cutting interest rates, Mr Battellino said.

The declaration leaves the only one question to be decided at the Reserve Bank board’s September 2 meeting – the extent of the cuts.

Macquarie Bank economist Rory Robertson who attended the inquiry’s hearing said it was looking increasingly likely that the cuts would come in two instalments: 0.25 percentage points in September, and a further 0.25 percentage points at the board’s following meeting on October 7.

“It was interesting the extent to which he was prepared to discuss the rate cut decision as if it had already been taken. He didn’t even try to be coy,” said Mr Robertson.

Two cuts of 0.25 per cent each would take a combined $90 per month off the cost of repaying a $250,000 mortgage if fully passed on by the banks.

The Deputy Governor stepped up pressure on the banks to pass on the cuts in full by telling the committee there had been a “material change” to their costs as a result of recent money market movements.

The bank’s total funding costs had “probably fallen by 0.25 percentage points or 0.30 percentage points”.

The Finance Minister Lindsay Tanner ruled out legislation requiring banks to pass on the cuts, saying that it would take Australia back to the days “when people ended up with cocktail loans where they borrowed a proportion at the official rate and had to borrow the rest at a really high rate”.

The head of the Commonwealth Bank Ralph Norris told the AM program that he would not accept anyone from the government telling him what to do.

“I don't think we live in a communist country. We will do what is commercially, appropriately, what is prudent,” he said.

3 comments:

vee said...

I'm not sure I believe it. It seems to make more sense to me to leave the rates as they are for a while then cut it on a 25pts basis later.

Is it political trickery, just so the banks cut back their interest rates?

Anonymous said...

I don't agree Vee. The economy really needs a boost with retail sales declining and consumer and business confidence around decade and a half lows.

Al

Letters said...

Letters to Editor, August 8, 2008

Don't like your bank? That's your bad luck

THE Reserve Bank's assistant governor, Philip Lowe, warns that banks risk "raising the ire of the public"(The Age, 14/8). But the public's ire with respect to banks is impotent. Banks provide an essential service and there is no adequate alternative.

Banks' behaviour in relation to charges, including interest rates, is driven not by the public's attitude or social or community considerations. It is driven by "shareholder value" - code for profit maximisation - the banks' basis for grossly high executive salaries and directors' fees. In this they all behave the same.

Switch to a credit union or a building society?

Valuable as they are for some people, credit unions
cannot support the branch structure necessary to be widely accessible. Like building societies, if they become significant in the market they tend to be swallowed up by a bank.

The virtues of market forces were extolled to support and drive deregulation. The banks' current power is an illustration of market forces at work. The RBA and the Government can only protest and issue empty warnings; call that virtue?

Janette Sheen, Mornington

RBA has lost the reins, it's time for regulation

THE Reserve Bank has lost control of monetary policy.

The RBA can put rates up but cannot effectively reduce them because the banks won't follow. And the cost of the banks' finances is only part of the reason.

There are two more important reasons. First, banks have got used to a high level of margins over a long period with the RBA's high interest rate policy. They have been able to lift rates over the past five or so years when their finance costs were falling and so have made extraordinary profits. Those profit margins are now built into profit forecasts and shareholder expectations.

Second, competition from non-bank financial institutions has dried up because these institutions rely far more heavily than the banks on increasingly expensive loans from overseas to finance their lending.

The situation is serious because the RBA has increased rates to a recession-inducing level and can't effectively reduce them. It's time for the Government to step in.

George Finlay, Balaclava

No credibility in reserve

MR RUDD, the banks and heath insurance funds are breaking the backs of all lower and middle-income earners. If you refuse to legislate to create limits on what they can charge for insurance and interest charges, you must create Commonwealth not-for-profit companies that can ensure effective competition to keep the services they offer more affordable.

We can save millions through the total removal of the RBA as it has absolutely no credibility or power to control what the banks charge in interest rates.

Mike Youngs, Oakleigh

Trust a bank. . .

JUST a hint that the Reserve Bank might lower interest rates and my bank has dropped its rate by 1.3% - on its term deposits!

Gloria Walter, Burwood

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