Australia's Rudd Under Fire for Giving Lenders Leeway on Rates

By Jacob Greber

Oct. 2 (Bloomberg) -- The Australian government has given the nation's banks an argument to withhold part of next week's potential central bank interest-rate cut, Opposition leader Malcolm Turnbull said.

Prime Minister Kevin Rudd said late yesterday Australian lenders ``are not immune from the impacts'' of rising finance costs amid the global credit squeeze and that he expects ``a maximum pass through'' of any cuts to the benchmark rate.

Turnbull, a former Goldman Sachs Group Inc. banker, seized on the comments as evidence the government has ``run up the white flag'' on banks, which are ``profitable enough to pass on in full any rate cut'' by the Reserve Bank of Australia. The debate flared ahead of next week's meeting of policy makers, who are expected to reduce the overnight cash rate by 50 basis points, according to a Bloomberg News survey.

``The government is being brutally honest and saying it how it is, but they're going to get pilloried politically,'' said Joshua Williamson, a senior strategist at TD Securities Ltd.

``Until we see the end of the credit crunch, which isn't likely until next year, we're going to be in an environment where not all of the Reserve Bank's cuts will be passed on.''

Rudd's comments were echoed yesterday by Treasurer Wayne Swan, who said he will be putting pressure on banks to ``ensure they pass on the maximum amount that is economically responsible given events in the global markets.''

The government's statements this week contrast with ones issued in August ahead of the Reserve Bank's Sept. 2 rate decision, when Swan said lenders including Commonwealth Bank of Australia and Westpac Banking Corp. had ``no excuse at all for not following the official cash rate down.''

Half-Point Cut

Reserve Bank Governor Glenn Stevens cut the benchmark rate by a quarter point to 7 percent last month for the first time in seven years on concern that domestic demand ``could weaken more sharply than necessary.''

Speculation has mounted in the past week that Stevens will be forced to cut by a half point next week, rather than a quarter point, as turmoil on financial markets prompts banks to hoard cash.

The interbank offered rate for Australian banks has climbed 65 basis points to 7.93 percent since Steven's interest-rate reduction last month, when the benchmark rate was 7 percent. The interbank rate is a gauge of bank funding.

Australian bank stocks have been buffeted after the U.S. government's $700 billion bailout for Wall Street was rejected by the House of Representatives. Commonwealth Bank has tumbled 23 percent this year, Westpac is down 15 percent, Australia & New Zealand Banking Group has declined 31 percent and National Australia Bank 32 percent.

Emotive Issue

Investors have increased bets on the size of the Reserve Bank's potential rate cut next week, according to a Credit Suisse Group index of interest-rate swaps. The chance of a 50 basis point reduction was 79 percent at 1:15 p.m. in Sydney, compared with 14 percent on Sept. 15.

Eleven of 18 economists surveyed by Bloomberg News yesterday predicted Stevens will cut the rate by half a point and seven expect a quarter-point reduction.

Cuts to the benchmark interest rate are an emotive issue in Australia, where around 90 percent of homeowners have variable- rate mortgages. That contrasts with the U.S., where the most borrowers have fixed-rate loans.

Prior to last month's central bank rate reduction, Australia's major lenders added an average 105 basis points to mortgage rates this year. Stevens had raised the benchmark by a total of 50 basis points in that time.

Bank Defense

``Australian banks have the capacity, given their profitability, given their size, to pass on in full any official interest-rate cut from the Reserve Bank,'' said Turnbull, who heads a coalition of opposition Liberal and National parties.

``Wayne Swan seems to have run up the white flag as far as interest rates are concerned with banks.''

Banks have rejected Turnbull's statement for showing a ``lack of understanding about the funding position of banks,'' according to the Australian Bankers' Association.

Demands by Turnbull to cut rates in full ``would potentially weaken the banks and further undermine the position of non-bank lenders at a crucial time for there to be stability in the sector,'' the association said in a statement.

Mike Smith, chief executive officer of ANZ Bank, signaled last week the nation's fourth-largest lender may not pass to mortgage customers all of any central bank rate cuts.

`Wait and See'

``It's in nobody's interests to keep rates high,'' Smith said. ``I want to reduce rates as well. However, I have to fund a book. We will have to wait and see.''

Commonwealth Bank's mortgages head Jim Sheffield told a parliamentary committee in Canberra on Sept. 25 that the bank would pass on ``as much to our customers as we can afford.

``But you have also got to bear in mind that we are in very turbulent waters at the moment,'' Sheffield said.

Banks and other lenders ``continue to face heightened levels of uncertainty in financial markets and future Reserve Bank rate cuts may not find their way to home loan borrowers,'' Fitch Ratings said in a report today.

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net