Banks Leave Reserve In Their Wake

Sydney Morning Herald

Saturday April 5, 2008

Jessica Irvine Economics Correspondent

ON the day that two banks raised their interest rates, the Governor of the Reserve Bank, Glenn Stevens, says he cannot promise rates will not rise again.

Appearing before a federal parliamentary committee hearing in Sydney yesterday, Mr Stevens said speculation of an interest rate cut was premature. "I can't even promise really that they might not rise again. But I think for the time being that [a cash rate of 7.25 per cent] is the right number."

The Commonwealth Bank raised its variable rate 0.12 percentage points to 9.44 per cent, while Suncorp raised its rate to 9.37 per cent.

In a sign that the bank's rates medicine is working, Mr Stevens said the bank was likely to lower its forecasts for inflation and growth in the years ahead.

"There is a problem. A response is needed. It is being made, and it will work," he said.

As the Rudd Government continues work on its first budget - touted as inflation-busting - Mr Stevens downplayed the importance of budget policy, saying interest rates remained the main tool for cooling inflation.

"I'll be happy to see any support from fiscal policy we can get, but I think we have to be realistic," he said. "When all is said and done, controlling inflation is mainly the central bank's job."

Mr Stevens continued to defend the big banks for lifting interest rates independently of the Reserve, arguing it was better to have profitable banks that could lend money. "We do not want to have a world where banks cannot make an adequate return on the lending and stop doing it."

On Labor's $31 billion in tax cuts, Mr Stevens said he remained agnostic. There was a case "even to raise taxes if you are really serious" to help cool demand. But there was also a case for delivering tax cuts.

Ross Gittins - Page 46

© 2008 Sydney Morning Herald

Back to News Index | Back to Home