RBA 'in a position to cut rates'

THE Reserve Bank of Australia (RBA) said today that it was in a position to consider cutting interest rates because reduced household spending made such a move "a lot easier".

THE Reserve Bank of Australia (RBA) said today that it was in a position to consider cutting interest rates because reduced household spending made such a move "a lot easier".

The RBA also defended the big commercial banks' refusal to commit to passing on any potential rate reduction, despite noting that their funding costs had fallen significantly in recent weeks.

"My guess is ... that the banks are saying it's unreasonable for them to give commitments when they don't know when the RBA is going to move, or by how much,'' RBA deputy governor Ric Battellino told a federal parliamentary committee hearing in Sydney.

Mr Battellino said total funding costs for banks had fallen by between 25 and 30 basis points in recent weeks.

He also said that Commonwealth Bank of Australia (CBA) chief executive Ralph Norris had "made an important point'' yesterday when he said it was in CBA's own interest to lower interest rates as much as possible for its customers.

In a strong indication that the official cash rate may fall by at least 25 basis points from 7.25 per cent next month, Mr Battellino said households had responded favourably to higher interest rates by reeling in their spending.

"That's why the Reserve Bank now finds itself in a position where it's able to think about cutting interest rates,'' he said.

"We were looking for a reduction in demand, we've seen that happen.

"The household sector has responded favourably by cutting back on spending and increasing their savings.

"That has made it a lot easier for the Reserve Bank to respond on interest rates.''

Any decision to cut rates could come despite inflation sitting well above the RBA's target range of 2 to 3 per cent.

"In the very near term, as we said in our statement, inflation could rise further,'' Mr Battellino said.

"That's not unusual because inflation lags the cycle in some ways.

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

The RBA was still on track to reduce inflation to within its two to three per cent target range, Mr Battellino added.

"We set out to bring inflation back to the target range and we're confident we're on that path, and that's why where in a position to be able to respond on interest rates.''

Despite the global credit crunch causing the collapse of several local non-bank lenders, Mr Battellino said the RBA had found no evidence that the Australian financial sector was uncompetitive.

While Australian banks were more profitable than their international peers, this was mostly because they had unusually low bad debt charges thanks to the strength of the local economy, he said.

Mr Battellino said non-bank lenders would probably return to their former glory at some stage because the recent fallout in the banking and financial sector was "cyclical in nature, rather than structural''.

"Where there's a buck to be made, people respond very quickly,'' he said.

"So I think we can be confident that market will reappear when financial conditions are appropriate.''

The very threat of the return of the non-bank lenders was enough to dissuade the big banks from acting uncompetitively, Mr Battellino added.

The central bank also said today that, at this stage, the RBA did not believe there needed to be any new government bodies set up to support non-bank lenders.

Mr Battellino was speaking before the House of Representatives standing committee on economics which is inquiring into competition in the banking and non-banking sectors.