Battellino Says Reserve Bank in Position to Cut Rates

By Jacob Greber and Gemma Daley

Aug. 14 (Bloomberg) -- Australia's central bank is in a position to cut interest rates from a 12-year high because consumers have trimmed spending enough to cool the economy and inflation, said Deputy Governor Ric Battellino.

``We cannot wait to see a fall in inflation before we start cutting rates because by then it would be too late,'' Battellino told a parliamentary committee in Sydney today. ``We try to be pre-emptive when we start tightening and pre-emptive when we start easing.''

Battellino signaled the Reserve Bank of Australia expects commercial lenders will pass on to customers any reductions in the benchmark rate. Governor Glenn Stevens and his board are preparing to lower borrowing costs for the first time in seven years as evidence mounts the $1 trillion economy is cooling.

``The Reserve Bank is hell-bent on cutting interest rates in September and nothing is going to get in the way of that,'' said Brian Redican, a senior economist at Macquarie Group Ltd. in Sydney. ``They expect banks to pass on those costs. That was the very blunt message'' of Battellino's testimony.

Australia's dollar traded at 87.21 U.S. cents at 12:13 p.m. in Sydney from 87.19 cents yesterday. The currency has dropped 11 percent against its U.S. counterpart the past month on speculation the bank will reduce rates as soon as September. The two-year bond yield was little changed at 5.82 percent.

Battellino said there has been a ``material change'' to the cost of funding at lenders in recent weeks, giving them scope to pass on reductions in the benchmark rate to borrowers.

Funding Costs

The total cost for banks has ``probably fallen by 25 basis points or 30 basis points,'' he said.

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.

``We will pass on some of that rate cut, there's no doubt about that,'' Ralph Norris, chief executive officer of Commonwealth Bank of Australia, the nation's largest mortgage lender, said in an interview. ``It's just what the quantum is: whether it's the whole 25 basis points, or a subset of it.''

Expectations of a reduction in the central bank's benchmark rate have led to a decline in the rate that commercial banks charge each other for loans. The three-month bank bill swap rate fell to 7.31 percent today from 7.76 percent at the end of July.

Australian Finance Minister Lindsay Tanner joined Treasurer Wayne Swan in warning lenders they may face stricter regulation if they don't pass on the Reserve Bank's rate cuts.

Government Warning

``The government would expect that a reduction in interest rates would be passed on by the banks,'' Tanner told Australian Broadcasting Corp. radio today. ``There are always options for indirect interventions that increase competition and that put more regulatory pressure on the banks.''

Governor 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 of 1.55 percentage points in that period as the global credit squeeze increased the cost of funding.

``We set about to bring inflation back'' within the bank's target band of 2 percent to 3 percent, said Battellino, who is a member of the bank's board. ``We're confident we're on that path. That's why we're in a position to respond on interest rates.''

Consumer prices will probably rise 5 percent in the fourth quarter, after climbing 4.5 percent in the second quarter, the central bank forecast this week. It expects the inflation rate will fall below 3 percent during 2010.

Economic growth will slow to 2 percent this year from 4.3 percent in 2007, the bank predicts.

Battellino also said today the ``worst'' of the global credit squeeze ``is behind us.''

``There's no doubt more to come, but the big leaps of losses are behind us,'' he said. ``The encouraging thing is that banks'' abroad have been ``able to raise so much new capital.''

To contact the reporters for this story: Jacob Greber in Sydney at jgreber@bloomberg.netGemma Daley in Canberra at gdaley@bloomberg.net