RBA sticks to cash target for a third month

After six rises in the cash rate target over the eight months to May the board of the Reserve Bank of Australia yesterday opted, in line with practically all forecasts, to leave the target rate unchanged for a third month in a row, at 4.50 per cent.

Cautionary factors received emphasis in the RBA's short statement on its reasons, including a reference to "some tightness in funding markets is evident, though not on the scale seen in late 2008."

The statement also noted that business credit appears to have stabilised (with RBA financial aggregates having been published last week), showing a mild rise in May after a long run of declines or no growth. The RBA continues to characterise growth in credit for housing (at 8.7 per cent on a 12-month basis) as "solid".

The current setting of monetary policy, the statement said, "is resulting in interest rates to borrowers around their average levels of the past decade", the reference that the RBA has most used for anchoring monetary policy expectations for the last year or more.

Cameron Clyne, chief executive of National Australia Bank, touched on the funding dilemmas facing banks at a talk at the American Chamber of Commerce in Adelaide yesterday.

"At the moment, you can get money," Clyne said. "It's out there, but at a cost …. It's going to be a rocky 12 months."

The Financial Review reported Clyne's remarks.

David Craig, chief financial officer of Commonwealth Bank, told the Financial Review that he saw no clear end to rising funding costs in the medium term and that the RBA cash rate was only a small part of the bank's funding.

Asked by the newspaper whether the CBA was likely to move independently of the RBA he said: "It's too early to tell, but clearly underlying funding costs are increasing."

Craig said that overall, new funding costs increased by 20 to 80 basis points over the past two months, a period in which the RBA left the cash rate unchanged.

He said the average total cost of funding was rising by around two basis points a month.

Craig said that he can "see no end to it, frankly, with the ructions in Europe."