Don't blame banks for rate hikes - RBA

RESERVE Bank governor Glenn Stevens says it is unrealistic to expect banks to move their lending rates with the official cash rate given "the recent environment".

RESERVE Bank of Australia governor Glenn Stevens says it is unrealistic to expect local banks to move their lending rates in line with the official cash rate given "the recent environment".

"The relationship between the cash rate (or, more correctly, the expected future cash rate) and rates on high quality private paper at a three-to-six month term is much looser at present than it has tended to be over recent years," Mr Stevens told a Sydney conference today.

"This means that the cost to banks of raising funds in the market has moved independently of the overnight rate.

"The presumption that their lending rates would and should move only in line with the cash rate, which had arisen in an earlier period when all these rates were much more closely related, has not been a realistic one in the recent environment."

The upward movement in lending rates beyond the official cash rate increases was acknowledged by the RBA when it raised the cash rate earlier this month.

Mr Stevens' speech, carrying the title of "Recent Financial Developments" was delivered to the Smart Capital 2008: the Euromoney Australian Financial Markets Innovation Congress in Sydney today.

All of Australia's major banks have increased their lending rates on various loans, either independent of any RBA move on rates, or above any central bank interest rate decision.

The RBA holds its monthly meeting next Tuesday, April 1.

Mr Stevens said the local financial community had "clearly been affected by the global turmoil", but was "weathering the storm well".

He said further details would be found in the RBA's half-yearly Financial Stability Review, due out at 11.30am (AEDT).

"There is very little direct exposure to the US sub-prime problems, but the main reason for the resilience is many years of robust economic growth, sound regulatory foundations and prudent risk management," Mr Stevens said.

The Reserve Bank had been carefully monitoring access to funding, including offshore funding, Mr Stevens said.

"We judge it to have been more than adequate, even if more expensive, though, of course, we will continue to watch the situation closely," Mr Stevens said.

He said profitability remained "very strong" and capital "sound".