Costello, RBA boss at odds on rates
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David Uren, Economics correspondent | September 20, 2007
TREASURER Peter Costello has contradicted Reserve Bank governor Glenn Stevens's forecast that banks will raise rates in response to the world credit squeeze, after the US Federal Reserve yesterday eased monetary policy for the first time in a year.
RBA Governor Glenn Stevens said banks were already passing higher costs on to some borrowers.
There was frenzied trading in world share, currency and financial markets as investors punted that the 0.5 of a percentage point cut in official rates by the US central bank may end the financial crisis of the past sixweeks.
Mr Costello welcomed the rate cut, but said global uncertainty could be expected to continue. This would lead non-bank home lenders to raise their interest rates but not the banks.
"There is no reason whatsoever for the major banks to lift rates to housing borrowers," hesaid.
However, Mr Stevens said on Tuesday the banks were already passing higher costs on to some borrowers and he expected that trend to continue.
Banks are starting to weigh the possibility that home loans may have to be rationed if the credit squeeze continues.
This would first hit people with poor credit histories or low home deposits.
The 0.5 per cent cut in the US Federal Reserve's key rate was larger than expected, and brought an immediate return of investors to higher-risk assets, such as the Australian dollar and bank shares.
The Australian dollar leapt 2.6c to US85.4c, one of its biggest one-day jumps in history, while the All Ordinaries index soared 2.5 per cent to close at 6362 points.
There was also movement in financial markets with the interest rate at which banks lend to each other falling by 0.1 per cent. Financial analysts said the market reaction was encouraging but it was too soon to declare the global credit squeeze over.
"What is going to be important is how markets play out over the next few days.
"Once the dust settles, it will be more important to see where the equity markets are trading and where interbank lending sits," said ANZ senior treasury economist Warren Hogan.
Mr Costello said Australia's economy was much stronger than the US, but would be affected by developments there.
"There will be consequences in Australia from this global uncertainty." he said. "For some mortgage originators, it means that they will have more difficulty raising money and they will raise it at higher prices and they will pass those prices to borrowers."
However, he said banks had enough deposits, profit and capital to absorb the rise in their funding costs. "The shareholders in banks have done pretty well in recent years," Mr Costello said.
ABN Amro chief economist Kieran Davies said banks in Europe and the US were weighing the possibility of curbing lending.
The problems in world capital markets were forcing banks to keep a lot more of their loans on their own books, rather than bundling them into bonds to be sold in world markets. This may limit the amount of new loans they can offer. "You would expect banks to start requiring people to have larger deposits and maybe become more reluctant to lend to the sub-prime and low-doc borrowers," Mr Davies said.
Mr Hogan said credit rationing was now "on the radar" of Australian banks, but there was no evidence of it occurring yet.
Mr Stevens said on Tuesday a credit squeeze could have separate effects on the price and the quantity of credit that is offered.
