RBA has 'ample scope' to cut the cash rate further and with impact on mortgage lending rates: Guy Debelle

The Reserve Bank has “ample scope" to use cash rate reductions to change mortgage lending rates despite regulatory changes impacting marginally on bank funding costs, says assistant RBA governor Guy Debelle.

His comments, delivered in a speech in Adelaide today, follow the release of the September 4 monetary policy meeting minutes, which said there was "scope to adjust policy in response to any significant deterioration in the outlook for growth".

Since the start of the current rate cutting cycle in November, banks have claimed that their funding cost pressures mean they are no longer as closely tied to the monetary policy settings of the RBA with ANZ going it alone on interest rate decisions since December (though the bank has not moved outside of RBA announcements since April).

Debelle said the impact of Basel III banking reforms,  which come into effect on January 1 next year, were likely to be “small and the effect on overall funding costs would be smaller still”.

He added that any costs of this magnitude were “well worth paying for a more stable financial system”.

Under Basel III reforms, Australia's largest deposit-taking intermediaries in Australia will be required to hold "high-quality liquid assets in quantities sufficient to withstand a 30-day period of stress".

“As regards the broader macroeconomic impact of the increase in Australian deposit-taking institutions’ (ADIs) funding costs, it is important to remember that in the setting of monetary policy, the Reserve Bank Board is conscious of the various rates at which credit is being priced.

“Consequently, where there has been an overall rise in the funding cost structure for intermediaries, the Board is able to set its cash rate target to appropriately take into account the effect on lending rates.

“In the current environment, there has been ample scope to lower the cash rate sufficiently so as to bring these other rates to where they need to be to achieve the desired stance of monetary policy, be they mortgage rates or business lending rates,” says Debelle.