Moves by Australian banks to raise mortgage rates independently of the central bank did not change the impact of monetary policy, a top central banker said on Tuesday, dampening speculation of a cut to its official rate in response.
Reserve Bank of Australia (RBA) Assistant Governor Guy Debelle told an economist seminar that the rise in mortgage rates in recent days was just one part of how monetary policy was transmitted throughout the economy.
Debelle was asked whether the move by the banks blunted the impact of RBA policy.
"I don't think it changes the effect of monetary policy on the economy much at all," said Debelle, who heads the central bank's financial markets division.
"Achieving the right rate setting for the economy, whether it's exactly right week by week, is not as important as month by month and I don't see that has changed materially at all. We still have, when we move interest rates, some impact on lending rates."
The central bank surprised many by not cutting the official cash rate last week, saying it was at the right level for an economy growing close to trend.
Australia's four major banks have since raised their standard variable mortgage rates by between 6 and 10 basis points, breaking the practice of recent years of only moving on rates when the RBA changes its cash rate.
The banks have blamed higher funding costs globally for the shift, as the European debt crisis leads investors to demand greater compensation for lending to banks everywhere.
The independent increase in mortgage rates was effectively a tightening in financial conditions, albeit a modest one, and might add to the case for a cut in official rates when the RBA holds its next policy meeting on March 6.
Interbank futures currently imply a 50-50 chance of a cut to 4.0 percent next month, but are fully priced for a move by April.
Higher home loan rates have a big impact in a country where over 90 percent of the A$1.2 trillion ($1.3 trillion) in mortgages are variable and just over a third of households have mortgages.
"Any lift in the variable mortgage rate officially places monetary policy back into the restrictive zone," said Annette Beacher, head of Asia Pacific research at TD Securities.
"Will the RBA react? Yes it will, but in its own time, not via pressure from the major banks. We expect a move to 3.75 percent by mid-year, with around half of that passed onto the variable mortgage rate, due to the favorable outlook for inflation."
Funding Costs Improving
Earlier, in a speech on the impact of the European crisis on Australian markets, Debelle said Australian banks were clearly facing higher funding costs because of the Europe's woes, though there had been an improvement in recent days.
Debelle said a retreat from European debt had boosted demand for Australian government bonds, with net purchases by foreigners over the first three quarters of 2011 amounting to more than 3 percent of gross domestic product, markedly larger than Australia's current account deficit.
He estimated that around 75 percent of the stock of government paper was held offshore, as at end September.
"Our discussions with market participants suggest that a sizeable share of recent purchases has been by sovereign asset managers," said Debelle.
This influx of money also appeared to be adding to the strength of the local dollar, which not far from a record peak on the euro and a 27-year high on the pound.
Debelle said that while Europe still faced many challenges, the ECB's three-year funding operation conducted in late 2011 had been successful in meeting the funding needs of banks in the region. The ECB holds another operation later this month.
"There is some possibility that banks will use that operation to fund increased purchases of sovereign debt and earn the large carry on offer, which might help alleviate the sovereign pressures for a time," said Debelle.
"Whether this happier state of affairs persists is difficult to tell," he cautioned. "There have been outbreaks of optimism over the past couple of years which were dashed."