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Debelle Says Bank Funding Costs Rising Relative to RBA Cash Rate

Australian banks’ funding costs have increased relative to the cash rate in the past year as competition for deposits intensified and wholesale funding costs rose, Reserve Bank Assistant Governor Guy Debelle said.

“Competitive pressures in the deposit market and risk premia for the banking sector globally have risen substantially. These have had a material impact on the cost to banks of funding their lending books,” Debelle said in prepared remarks for a forum in Sydney today. “The Reserve Bank board takes these developments into account in its setting of the cash rate.”

RBA officials are insisting that monetary policy tools remain potent even after Australia’s four largest lenders boosted mortgage rates independent of the central bank in February. The banks cited higher funding costs that are narrowing their margins. Policy makers have left the overnight cash rate target unchanged at 4.25 percent for the past two months as concerns about Europe’s sovereign-debt crisis eased.

“The cash rate set by the Reserve Bank board is the short-term interest rate benchmark that anchors the broader interest rate structure for the domestic financial system,” Debelle, who oversees financial markets, said in the text.

Cost Increases

In a bulletin released March 15, the RBA said that, based on current trends, wholesale funding costs are likely to rise by as much as 10 basis points relative to the overnight cash rate target by the end of this year. Last month, Commonwealth Bank of Australia, National Australia Bank Ltd., Westpac Banking Corp. and Australia & New Zealand Banking Group Ltd. boosted interest on variable-rate home loans by an average of about 10 basis points.

Treasurer Wayne Swan condemned the banks’ actions, urging customers to shop around for better rates.

The RBA lowered its key rate by a quarter percentage point on Nov. 1 and Dec. 6. House prices slumped by a record last year and unemployment rose in February to 5.2 percent.

“Since the middle of 2011, however, there has been a further increase in banks’ funding costs relative to the cash rate of the order of 20-25 basis points,” Debelle said today.

Currency Gains

The local currency has risen about 3.5 percent in the past year and reached a six-month high of $1.0845 after the RBA unexpectedly kept rates unchanged at its Feb. 7 meeting.

The European Central Bank is flooding its financial system with cheap money in a bid to avert a credit crunch after the market for unsecured bank debt seized up last year and funding from U.S. money markets disappeared.

Since the global financial crisis of 2008-2009, Australian consumers have become more cautious with their investments, a trend that strengthened as Europe’s fiscal problems deepened.

“Households have significantly increased their term deposits placed directly with banks, instead of investing in other financial assets,” Debelle said. “There has also been a rise in deposits placed via superannuation and managed funds.”

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