Rate cut over high bank charges

Kieran Salsone

THE Reserve Bank of Australia has revealed its latest interest rate cut was done partly to compensate for higher lending rates being charged by banks.

According to the minutes of the RBA board meeting on monetary policy, the 50 basis points cut was aimed at delivering the "appropriate level" of borrowing rates after "interest rates faced by the general community" had tended to increase a little since December.

Board members at the meeting on May 1 decided to cut the cash rate to 3.75% from 4.25%.According to the minutes, new information had led the RBA to lower somewhat its assessment of the pace of growth of the economy.

Board members also noted the international economic and financial environment remained quite uncertain.

"Conditions were weak in the euro area, and the risk of an escalation of sovereign debt problems remained. Prospects were for the US economy to continue its gradual recovery, while growth in China was likely to be slower than in recent years but on a more sustainable footing," the minutes read.

Recent evidence suggested that the Australian economy was growing somewhat below trend.

"While the mining boom continued to gain momentum, overall growth was being weighed down by weakness in other sectors of the economy," the minutes reported.

At the same time, credit growth for households had been marginally lower over the past year than over the previous year, and business credit was rising at only a very modest rate. Elevated competitive pressures had kept deposit rates in Australia high relative to the cash rate.

At the margin, wholesale funding costs had declined over recent months, though they remained higher, relative to benchmark rates, than in mid 2011, and the lagged effects of this were still working their way through the funding structure.

The rise in funding costs had led banks to increase their lending rates over recent months by around 10-12 basis points.

According to the minutes, given recently accumulated information on demand and the rate of inflation, together with the revised forecasts that had been presented, members had considered it appropriate for interest rates to be eased.

"Members noted that interest rates faced by the general community had tended to increase a little since the board's previous change to the cash rate in December," the minutes noted.

"They judged it to be desirable that interest rates move below those that had prevailed in December. Accordingly, the board decided that a reduction of 50 basis points in the cash rate was, in this instance, necessary in order to deliver the appropriate level of borrowing rates."

The minutes suggest the RBA is taking a wait-and-see approach to further interest rate cuts.

Topics:  banks cash rate interest rate rba

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