Governor Likes Banks With Funds

Sydney Morning Herald

Saturday April 5, 2008

Jacob Saulwick

THE Reserve Bank governor, Glenn Stevens, has reiterated his defence of highly profitable Australian banks adding premiums to official rate increases, saying that the alternative - banks not having enough money to lend - would be worse.

Amid signs that demand in the economy is slowing, Mr Stevens yesterday hinted that interest rates might be on hold until the turbulence from the credit crisis stabilised.

The governor was addressing a House of Representatives committee hearing in Sydney. He said while inflation was likely to hit 4per cent this year, weakening household demand and business confidence were evidence that growth was starting to cool.

"While those measures can provide false signals, our assessment is that a change in trend is occurring, and we are hearing that from businesses we talk to," Mr Stevens said.

"A tightening in financial conditions, lower share prices and heightened concerns over the global financial problems will all have played a part in this change."

Retail trade figures yesterday appeared to confirm the governor's comments, with the value of sales dropping by 0.1per cent in February after a similar fall in January.

Mr Stevens said it was likely the Reserve would have lifted rates again had the banks not put up rates independently.

He stressed that while Australia's big banks were coping with the added burden of rising funding costs in international markets, the Australian financial system could not remain insulated from global events.

"The rise in the wholesale cost of term funding has meant that many non-bank and some bank lenders have had to slow the growth of their businesses," he said.

Some market economists took the governor as meaning rates were on hold or even that the next move could be down.

ABN Amro's chief economist, Kieran Davies, said for the Reserve to cut rates before it lifted them again, "we would need to see either evidence that the economy was falling into a hole rather than slowing down or problems emerge in the banking system. With respect to the latter, the governor again emphasised the positive fundamentals of local banks."

Government MPs quizzed Mr Stevens, who was flanked by high-ranking Reserve officials, on whether he endorsed banks increasing interest rates off their own bat.

The governor said the economy would be much worse off if banks were not profitable.

"While I know that in some ways people feel, perhaps, aggrieved that banks are highly profitable, there are a lot of other banks around the world right now that are bearing very large losses and are struggling to replenish their capital, and because of that they are not in a position to do much lending.

"So, if you were to ask me which of those scenarios I think is preferable, the one we have - for all the presentational issues that it gives us - is the preferable scenario of the ones that are on offer around the world," Mr Stevens said.

© 2008 Sydney Morning Herald

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