Wednesday, March 28, 2012

The ANZ may set its own rates, but we control the overall level - Reserve

The Reserve Bank believes that it, rather than retail banks controls the general level of Australian interest rates, notwithstanding moves by the ANZ and other banks to adjust rates independently.

Addressing a global investment conference in Sydney assistant governor Guy Debelle said the decisions made by his board each month remained “the primary determinant of the funding costs and lending rates of the banking system in Australia”.

While “obviously things like risk premiums and competitive pressures move around,” when the Bank moves its cash rate “the whole structure of funding costs tends to move up or down with it”.

Dr Debelle said it would surprise to people outside Australia to learn that the funding costs of Australian banks made front page news on a fairly frequent basis.

But the Bank takes “account of the fact that competitive pressures and risk premiums move around, and by-and-large tries to offset the movements so we end up with a level of interest rate which is consistent with the desired stance of monetary policy”.

While overseas funding costs climbed in the second half of last year before retreating somewhat early this year, much of the pressure on bank funding costs came from the rates they offered to Australian depositors.

Although the Reserve Bank cut its cash rate 0.50 points since November the banks cut the rates they offered to depositors only 0.25 points.

“In other words, relative to the cash rate the cost of deposit funding has gone up by 0.25 points,” Dr Debelle said... “Since the middle of last year funding costs for the Australian banking system have fallen in absolute terms, but generally unappreciated is that most of the funding pressure has come from the deposit side of things.”

So attractive had banks made deposits that they now accounted for more than 50 per cent of their funding, up from 40 per cent before the global financial crisis. Within that total higher-rate term deposits had climbed from 30 per cent of bank funding to 45 per cent.

Despite this the Reserve Bank still set the overall stance of rates with the link between movements in its cash rate and lending rates “much tighter than in many other countries."

In today's Sydney Morning Herald and Age

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