By Tracy Withers Dec. 16 (Bloomberg) — Australia’s monetary policy is “now back in the normal range,” after lenders raised business and home-loan rates by more than the central bank has increased the overnight cash rate target, Deputy Governor Ric Battellino said. The nation’s currency and bond yields fell after Battellino told a conference in Sydney that interest rates being paid by borrowers are now “above their previous cyclical lows,” making it “reasonable to conclude that the overall stance of monetary policy is now back in the normal range.” Traders slashed bets that the central bank will add to a record three interest rate rises between October and this month, which took the benchmark rate to 3.75 percent from a half- century low of 3 percent. Three of Australia’s four largest banks increased their borrowing costs by more than the central bank’s latest move, drawing criticism from Treasurer Wayne Swan . With the economy improving, the justification for wider margins on bank loans is becoming less compelling, Battellino said. Australia’s economy expanded in the three months through September for a third straight quarter, rising 0.2 percent from the previous three months, the Bureau of Statistics said today. The Australian dollar fell to 90.19 U.S. cents as of 12:05 p.m. from 90.44 before the speech, the biggest decline against the U.S. dollar today among the 16 most-traded currencies. The yield on the one-year note fell 14 basis points, or 0.14 percentage point, to 4.09 percent, the biggest decline since Nov. 3, according to Bloomberg data. Rate Bets Investors are betting there is now only a 32 percent chance of a quarter-point increase in the benchmark lending rate to 4 percent at the central bank’s next meeting on Feb. 2, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 12:06 p.m. Just two days ago, traders saw a 78 percent chance of another increase. Westpac Banking Corp. , Australia and New Zealand Banking Group and Commonwealth Bank of Australia this month raised their standard variable home loan rates by more than the central bank, citing higher funding costs. Interest rates in the economy have increased by about 1 percentage point relative to the cash rate over the past couple of years, meaning today’s levels are consistent with a pre- crisis cash rate of “at least” 4.75 percent, Battellino said. “The interest rates that matter in the economy, the rates on housing and business loans and the rates on deposits and debt securities, have all risen relative to the cash rate,” Battellino said. “The Reserve Bank has taken these changing relativities into account in its monetary policy decisions.” Funding Costs Liquidity dried up during the crisis, making it more expensive for banks to borrow the funds required to write loans. While Australia’s economy has started to recover, Westpac Chief Executive Officer Gail Kelly said last week that funding costs may never drop to pre-crisis levels. Westpac raised mortgage rates by almost two times the 25 basis-point increase in the Reserve Bank of Australia’s benchmark interest rate on Dec. 1. Treasurer Swan predicted a “backlash” by customers, and the bank was labeled a “scrooge” by the Daily Telegraph newspaper. Westpac Chairman Ted Evans today defended the rate rises. “With interest rates now clearly on the rise again, both at home and abroad, there are limits to how long we could continue to absorb these costs without weakening our bank, the Australian financial system and, hence, the Australian economy,” he said in a speech at the bank’s shareholders meeting in Melbourne. Increased Competition Increased competition by banks for deposits has added substantially to their costs of funds, Battellino said. Deposits account for 43 percent of funding, domestic capital markets provide 19 percent, and foreign markets 28 percent, he said. The cost of funding from deposits, relative to the cash rate, has increased by 1.47 percentage points since July 2007, he said. The cost of new long-term debt has risen by 1.73 points. Bank margins are now “a little wider” than at the start of the crisis and should “level out” amid competition, Battellino said. “If interest rates in the economy are rising relative to the cash rate, there is less need for the cash rate to rise,” he said. To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net .
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Australia Interest Rates Back to `Normal,’ Battellino Says; Currency Falls
