Fed: Banks' rate stance "serious issue" for economy: Swan

AAP General News (Australia)
08-18-2008
Fed: Banks' rate stance "serious issue" for economy: Swan

By Colin Brinsden, Economics Correspondent

CANBERRA, Aug 18 AAP - Federal Treasurer Wayne Swan says the retail banks will be putting
the economy at risk if they don't match any interest rate cut by the Reserve Bank of Australia
(RBA).

The RBA will release minutes from its August 5 board meeting tomorrow - a meeting where
it appears to have had a marked change of heart about the economic outlook.

It has already clearly indicated that it intends to cut its key cash rate because of
a rapid slowdown in economic growth - financial markets expect the first move to be next
month.

But the retail banks refuse to guarantee they will follow suit, drawing a series of
threats and warnings from the government.

"This is a very serious issue," Mr Swan told the Fairfax Radio Network in Adelaide.

"It's a very serious issue for households, it's a very serious issue for business and
it's a very serious issue for our national economy.

"There is absolutely no excuse for banks not to pass an official rate cut from the
reserve bank in full, should that occur. Absolutely no excuse."

Deputy RBA Governor Ric Battellino and Assistant Governor Philip Lowe separately expressed
similar sentiments last week, saying that borrowing conditions had improved for retail
banks and shouldn't stand in the way of lower mortgage rates.

Some economists believe it was last month's independent rate increases by the banks
that are forcing the RBA to act quickly in lowering rates for fear of crippling the economy.

Lehman Brothers Australia chief economist Stephen Roberts said tomorrow's minutes may
show whether there was any discussion about cutting the cash rate at the August 5 meeting.

"It may be interesting to see whether there was any ... discussion about the size of
rate cuts and their relationship to bank lending rates, which seem to have become the
interest rates that the RBA has become most interested in for policy purposes," Mr Roberts
said.

Financial markets are betting on a quarter percentage point cut in the 7.25 per cent
cash rate at the RBA's September 2 meeting, and at least one further one before the end
of the year.

The commercial banks have increased their lending rates by around 0.55 percentage points
on top of the two increases made by the RBA this year, blaming the increases on the global
credit crunch which has forced up their own borrowing costs.

Mr Swan said there was justification for the some of that increase by the retail banks.

"In recent times, the cost of borrowing money short term has come down and that is
a considerable benefit to the banks," Mr Swan said.

"What I've said is that we are always looking at the extent of competition within the
mortgage market and if the banks don't move, I've said the Treasury are examining a range
of options and all options are on the table."

He would not elaborate on these options, but ruled out that the government would regulate
interest rates.

"There is no way in the world we can return to a situation where the federal government
regulates interest rates," he said.

AAP cb/it/cdh

KEYWORD: ECONOMY NIGHTLEAD

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