RBA: Competition and overseas funding important

The Reserve Bank of Australia (RBA) said today interest rates are largely determined by the RBA cash rate, but overseas funding costs and competition for deposits also play a part.

“Financial institutions have increased their lending rates in the face of the increase in costs to maintain their net interest margins,” RBA assistant governor Guy Debelle said in a speech to the Australian DCM Summit in Sydney. “In turn, this has been with the aim of maintaining profitability.”

He said the cash rate deliberated on in the RBA board meetings was influential. “When the cash rate is adjusted up or down, the whole structure of interest rates in the economy moves up and down,” he said.

But overseas fund wholesalers looking to lend money to Australian banks determine the interest rate they charge on what risk they perceive in Australia.

“Risk premia are an important component of borrowing costs for private sector entities, including the banks,” he said. “Over the past few years 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.”

In the wake of the global financial crisis, when banks were failing, and during the current Greek crisis, perceived risk for those lenders has grown.

ANZ CEO Mike Smith has moved to calm international concerns about the risk of Australia’s housing market to potential funders, who are concerned Australia is the only developed economy yet to see a housing price correction, Business Spectator reports today.