We're still in charge, says Reserve Bank

The RBA's Guy Debelle said the big four lenders were not blunting the influence of policy makers on the economy. Photo / Bloomberg

Australia's central bank says it still holds sway over the nation's economic cycle, downplaying suggestions that domestic lenders are blunting policymakers' influence.

The Reserve Bank of Australia (RBA) a week ago left its benchmark interest rate at 4.25 per cent, defying the predictions of 24 of 27 economists for a third straight quarter percentage-point cut. Australia's four largest lenders boosted mortgage rates anyway, citing higher funding costs that are narrowing their margins.

"I don't think that changes the effect of monetary policy on the economy much at all," said Assistant Governor Guy Debelle, who oversees financial markets. "When we move interest rates, it's still going to have some impact on lending rates."

Commonwealth Bank of Australia increased its variable home loan rate by 10 basis points to 7.41 per cent yesterday, followed by National Australia Bank adding nine basis points to 7.31 per cent. Westpac added 10 basis points to 7.46 per cent on Friday, after ANZ Bank added six points to 7.36 per cent.

ANZ Bank and Westpac cited higher debt premiums and competition for deposits.

Treasurer Wayne Swan condemned the banks' actions, urging customers to shop around for better rates.

Debelle said a surge in international holdings of Australian government bonds, equal to more than 3 per cent of gross domestic product over the first three quarters of 2011, had propelled the nation's currency and pushed yields down to half-century lows.

"The Australian dollar is close to its recent highs despite the terms of trade declining from their peak in the September quarter," Debelle said.

The local currency has risen about 5 per cent this year and reached a six-month high last week after the RBA unexpectedly kept rates unchanged at its February 7 meeting.

Demand for Australian resources and rates higher than any other major developed nation spurred the Australian dollar to $1.1081 in July, the highest level since it was floated in 1983.

In response to questions, Debelle said the appreciation of the currency "is a tightening in conditions, which was taken into account in the board's deliberations". Questioned on the difficulty in predicting the central bank's intentions on borrowing costs, after only three economists correctly forecast no rate change last week, Debelle said he was not sure if the RBA was hard to read. "What matters is the general direction on rates. What we're doing is setting rates which are appropriate for the economy as a whole, not what's appropriate for bond-market position holding."

Debelle's prepared remarks focused on the fallout of Europe's sovereign-debt crisis on Australia. While fallout had been limited, it was being felt in investors demanding "much higher compensation" for bank credit risk than they were in mid-2011, he said.

"This global repricing of bank debt has clearly affected the Australian banks' wholesale funding costs."