The second most senior executive at the Reserve Bank, Deputy Governor Ric Battellino, has made it very clear that interest rates are going to fall, and the central bank expects the country’s banks to fall into line very quickly.

The rate cut will come on 2 September and its now just a question of how much: 0.25% or 0.50%. The smaller sized cut is the cautious RBA style; the 0.50% cut is one that would force all banks to cut, but also give the bank room to sit until the end of the year before looking at rates again.

In comments to the House of Representatives Standing Committee on Economic inquiry on bank competition in Sydney this morning, Mr Battellino said:

We cannot wait to see a fall in inflation before we start cutting rates because by then it would be too late. We try to be pre-emptive when we start tightening and pre-emptive when we start easing. We set about to bring inflation back within the central bank’s target band of 2 percent to 3 percent. We’re confident we’re on that path. That’s why we’re in a position to respond on interest rates.

The bank said in its Monetary Policy Statement for the third quarter, released on Monday, that it saw inflation falling below 3% in mid to late 2010. The level of comments on rates, and the almost direct “yes rates will fall” approach evident in these comments is almost unprecedented from the central bank.

If Mr Battellino’s comments had been made a year ago, they would have caused a sensation as there was no post meeting statement, except where rates were cut or increased and there was certainly no release of the minutes. We would have had no way of knowing what the RBA’s current thinking was, except by “strategic” leak to media members on the drip.

What is also unprecedented is the “jawboning” of the banks to cut rates.

Assistant Governor Phil Lowe laid out a very detailed case as to why our banks had no financial strains and were very profitable and highly rated, and therefore in a position to cut rates because market rates had eased as the strains of the credit crunch dissipated, at least in Australia.

Today Mr Battellino continued the attack, revealing he thought the worst of the crunch was now over (the RBA has thought that now for several months, apparently). He again pointed out how profitable the Australian banks were:

When we look at bank profitability, we find that Australian banks are around the top of the international range. On the surface, this could indicate a lesser degree of competition than elsewhere. But when we look a bit deeper it seems that an important reason for the high profitability of Australian banks is their unusually low bad debt experience.

It’s going to be impossible for the banks to not cut rates now: their stupidity and sidestepping over the past fortnight has seen them outflanked by the RBA in a way that is a delight to see.

Peter Fray

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