Friday, August 15, 2008
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.