Speaking yesterday in Sydney, deputy governor of the Reserve Bank of Australia, Ric Battellino, said that interest rates have now returned to a level that can be considered normal, as opposed to the emergency levels the central bank instituted during the financial crisis.

The speech rather knocked askew the expectations of investors, who had been wondering if the RBA would raise interest rates a fourth time in early 2010. The Australian dollar sank against the U.S. and Canadian dollars and the Japanese yen following Mr. Battellino’s speech with that change in expectations. Also affecting the exchange rate was the release of Australia’s third quarter gross domestic product, which showed the economy grew by only 0.2% in the quarter and 0.5% in the year, about half of what analysts had predicted.

Although the RBA’s cash rate remains low by historic standards, Mr. Battellino pointed out that in the past three months, retail banks had instituted larger rate hikes than those of the central bank and had never passed along all of the central bank’s rate cuts, especially in credit card rates. Therefore, rates being paid by mortgage holders and businesses were closer to a cash rate of 4.75% than the actual 3.75%.

“[T]he overall stance of monetary policy is now back in the normal range,” said Mr. Battellino.

He added that retail banks can no longer attribute any larger interest rate moves on their part to their own higher borrowing costs, as they are now earning 0.02% higher profit through mortgages and other loans than they were prior to the international financial meltdown. The worst of the global credit crunch has also eased, making it easier for banks to borrow from each other at more competitive rates. However, Mr. Battellino defended the banks’ larger moves to date, stating that absorbing such costs rather than passing them on would have impeded their ability to continue lending.

“[T]he economic justification for wider margins on loans is becoming less compelling, so it would be reasonable to assume that, in a competitive banking sector, we should see margins level out,” said Mr. Battellino.

Source: smh.com.au