RBA confirms rates will fall - but when?

THE central bank has given its loudest signal yet that it is about to cut interest rates, as data shows wage inflation remains under control.

RBA confirms rates will fall - but when?

THE central bank has given its loudest signal yet that it is about to cut interest rates, as data shows wage inflation remains under control.

Reserve Bank of Australia deputy governor Ric Battellino said at a parliamentary inquiry in Sydney yesterday that domestic demand was slowing and inflationary pressures easing.

"That's why we now find we are in a position to cut interest rates," he said.

"We cannot wait to see a fall in inflation before we start cutting rates because by then it would be too late."

The banking competition inquiry heard from home finance lenders including Aussie Home Loans and investment bank JP Morgan.

Also yesterday, economists said it was unlikely the RBA would keep interest rates on hold because of modest rises in average wages.

The Australian Bureau of Statistics reported the average weekly ordinary time earnings for adult full-time employees increased by 0.7 per cent in the three months to May for an annual rate of 3.7 per cent, seasonally adjusted.

Some economists predict the RBA will cut rates by 0.25 of a percentage point when it meets on September 2. However others believe homeowners may have to wait until November.

But major banks have so far refused to guarantee they will follow the RBA's lead and cut their rates.

Finance Minister Lindsay Tanner said the Government was powerless to force the banks to pass on savings.

'I don't think there are realistic options for direct intervention but there are always options for indirect interventions that increase competition and that put more regulatory pressure on the banks," he said.

"I would expect, like the Reserve Bank, that any reduction in interest rates would be passed on by the banks.

"But I can understand why their chief executive officers are being cautious about giving rolled-gold guarantees about these things, because they've got other factors that they have to worry about as well.

"The banks will carry a very heavy onus to explain any variation from any reduction by the Reserve Bank in the rates as compared with what they actually do.

'It's difficult to imagine a circumstance where the Government could directly control interest rates without a whole range of adverse consequences occurring."