By Tracy Withers and Jacob Greber Dec. 16 (Bloomberg) -- Australia’s monetary policy is “now back in the normal range” after lenders raised business and home-loan rates by more than the central bank has increased the overnight cash rate target, Deputy Governor Ric Battellino said. The nation’s currency and bond yields fell after the Reserve Bank’s Battellino told a conference in Sydney that interest rates being paid by borrowers are now “above their previous cyclical lows,” making it “reasonable to conclude that the overall stance of monetary policy is now back in the normal range.” Traders slashed bets that the central bank will add to a record three interest-rate increases since October, which took the benchmark to 3.75 percent from a half-century low of 3 percent. A report today showing Australia’s economic growth slowed to 0.2 percent in the third quarter also gives the Reserve Bank scope to pause. “The increase in key variable mortgage rates above the cash rate is helping the Reserve Bank out and reducing the amount of heavy lifting it has to do,” said Su-Lin Ong, senior economist at RBC Capital Markets Ltd. in Sydney. “This type of commentary suggests the market will pare back substantially the possibility of a February move.” Three of Australia’s four largest banks increased their borrowing costs by more than the central bank’s Dec. 1 quarter- point increase, drawing criticism from Treasurer Wayne Swan. Less Justification With the central bank and government forecasting the economy will improve, the justification for wider margins on bank loans is becoming less compelling, Battellino said. The Australian dollar fell to 90.05 U.S. cents as of 1:55 p.m. from 90.67 before the speech and growth report, the biggest decline against the U.S. dollar today among the 16 most-traded currencies. It has dropped 4.3 percent since hitting a 15-month high on Nov. 16. The yield on the two-year government note fell 16 basis points, or 0.16 percentage point, to 4.28 percent, the biggest decline in more than two months, according to Bloomberg data. Investors are betting there is now only a 36 percent chance of a quarter-point increase in the benchmark lending rate to 4 percent at the central bank’s next meeting on Feb. 2, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 1:16 p.m. Just two days ago, traders saw a 78 percent chance of another increase. Westpac Banking Corp., Australia and New Zealand Banking Group and Commonwealth Bank of Australia this month raised their standard variable home-loan rates by more than the central bank, citing higher funding costs. Cash Rate Interest rates in the economy have increased by about 1 percentage point relative to the cash rate over the past couple of years, meaning today’s levels are consistent with a pre- crisis cash rate of “at least” 4.75 percent, Battellino said. “The interest rates that matter in the economy, the rates on housing and business loans and the rates on deposits and debt securities, have all risen relative to the cash rate,” he said. The Reserve Bank had taken these changing relativities into account in its monetary policy decisions. “It’s very striking to get such explicit reference on the implications of funding costs for monetary policy,” said Sean Callow, a Sydney-based senior currency strategist at Westpac Banking Corp. “To suggest that under the new normal, 3.75 equals at least 4.75, is really quite staggering. We got a very big response on the interest-rates market.” The Reserve Bank’s 3.75 percent benchmark interest rate compares to borrowing costs close to zero in the U.S. and Japan. Economic Growth Australia’s economic growth slowed in the third quarter to 0.2 percent from the previous three months, when it expanded 0.6 percent, the Bureau of Statistics reported today in Sydney. Still, it is one of the few economies in the world to avoid the global recession, expanding for three straight quarters. An emerging global rebound saw Europe’s economy emerge from its worst slump in more than six decades in the third quarter, expanding 0.4 percent from the previous three months. The U.S. economy grew at a 2.8 percent annual pace. Liquidity for banks dried up during the global credit crisis, making it more expensive for lenders to borrow the funds required to write loans. While Australia’s economy has kept growing, Westpac Chief Executive Officer Gail Kelly said last week that funding costs may never drop to pre-crisis levels. Westpac raised mortgage rates by almost two times the Reserve Bank’s December increase. Treasurer Swan predicted a “backlash” by customers, and the bank was labeled a “scrooge” by the Daily Telegraph newspaper. Westpac Chairman Ted Evans today defended the rate rises. Deposit Competition “With interest rates now clearly on the rise again, both at home and abroad, there are limits to how long we could continue to absorb these costs without weakening our bank, the Australian financial system and, hence, the Australian economy,” he said in a speech at the bank’s shareholders meeting in Melbourne. Increased competition by banks for deposits has added substantially to their costs of funds, Battellino said. Deposits account for 43 percent of funding, domestic capital markets provide 19 percent, and foreign markets 28 percent, he said. The cost of funding from deposits, relative to the cash rate, has increased by 1.47 percentage points since July 2007, he said. The cost of new long-term debt has risen by 1.73 points. Bank margins are now “a little wider” than at the start of the crisis and should “level out” amid competition, Battellino said. “If interest rates in the economy are rising relative to the cash rate, there is less need for the cash rate to rise,” he said. To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net; Jacob Greber in Sydney at jgreber@bloomberg.net;

Source