Australian Banks Have `No Excuse' on Rates, Swan Says

By Robert Fenner

Aug. 17 (Bloomberg) -- Australian banks have no excuse to hold borrowing costs steady should the nation's central bank cut official interest rates this year, Treasurer Wayne Swan said.

``The banks have simply no excuse, no excuse at all for not following the official cash rate down,'' Swan told Australian Broadcasting Corp. television today.

Governor Glenn Stevens and his Reserve Bank board are preparing to trim borrowing costs for the first time in seven years as evidence mounts that Australia's $1 trillion economy is cooling. Ric Battellino, deputy governor, this week said the central bank is in a position to lower rates from a 12-year high because consumers have reduced spending enough to cool the economy and inflation.

``The banks keep making arguments that they are in a competitive environment and how they respond to an official rate cut will be the acid test to see if that is true,'' said Christopher Zinn, a spokesman for Choice, Australia's largest consumer association. ``The banks moved in lockstep to raise rates when the reserve was doing so.''

Stevens and his board raised rates four times between August 2007 and March 2008, increasing the benchmark overnight cash rate target by a total of 1 percentage point. The nation's five largest banks have boosted home-loan rates by an average 1.55 percentage points in that period as the global credit squeeze increased the cost of funding.

Swan said borrowing costs in international credit markets are now declining, adding to the amount banks can cut rates.

`Passing on Benefits'

``In the longer term, if those rates continue to come down then the banks should be passing on those benefits as well,'' he said. ``But if the price of money is coming down then they should be following it there too in the long run.''

The Reserve Bank will lower the overnight cash rate target, currently at 7.25 percent, on Sept. 2, according to 18 of 25 economists surveyed by Bloomberg News. Thirteen expect a cut of 25 basis points and five forecast 50 basis points. A basis point is 0.01 percentage point.

``The public have got a right to expect when official rates come down, then rates set by the banks come down as well,'' Swan said. ``The truth is that a substantial proportion of their borrowing costs come down when the RBA takes the decision to move rates down.''

The government wants to increase competition among banks to lower home-loan costs, with new rules to be introduced in November to make it easier for customers to switch their mortgages to other lenders.

``So, if customers are unhappy with the behavior of their bank, they can more easily shift their account,'' Swan said. ``I would hope to see the market become much more competitive.''

Swan declined to comment on whether he will approve Westpac Banking Corp.'s A$17.4 billion ($15 billion) agreed takeover bid for St. George Bank Ltd.

The Australian Competition & Consumer Commission, the nation's antitrust regulator, this week approved the deal to create the nation's biggest mortgage lender as it was ``unlikely to substantially lessen competition.''

``I don't speculate about the outcome of that decision,'' Swan said. ``But we have our eye on financial stability in the system, as well as the competitive nature of the system, when I take that decision about national interest considerations.''

To contact the reporter on this story: Robert Fenner in Melbourne rfenner@bloomberg.net