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AAP

2012-12-05

The central bank has cut its cash rate more than it normally would have because banks are not passing on the rate reductions in full, a senior central bank official says.

Reserve Bank of Australia (RBA) deputy governor Philip Lowe said in a speech in Sydney on Wednesday that for most of the decade before the global financial crisis it was normal for lending rates to move in lock-step with the RBA's cash rate.

"This has obviously changed over recent years, as bank funding costs and hence mortgage rates have risen relative to the cash rate," he told the Australian Business Economists (ABE) Annual Conference.

"The board of the RBA has taken account of this in its monthly policy decisions.

"As a result, the cash rate today is around 1.5 percentage points lower than it otherwise would have been."

After the RBA's decision to cut the cash rate by 25 basis points to three per cent on Tuesday, three of the four big banks said they would cut their standard variable home loan rate by only 20 basis points.

The ANZ will review its variable rates on December 14.

When the central bank cut the cash rate by 25 basis points at its October board meeting the NAB, Commonwealth and ANZ banks cut their standard variable rates by 20 basis points and Westpac cut by 18 basis points.

Dr Lowe said many of the countries that avoided the global financial crisis, which included Australia, were experiencing uncomfortably high exchange rates and low interest rates.

"Given that exchange rates are relative prices, not every country can simultaneously have a lower exchange rate," he said.

"This is one of the mechanisms through which the weak conditions in most of the advanced economies are transmitted to the rest of the world."

In his speech on Wednesday night, called What is Normal Dr Lowe also spoke about the strength of the Australian economy and the contrasting lack of consumer and business confidence.

He said Australia has had 20 years of uninterrupted economic growth and this had affected how Australians viewed the economy.

"Twenty years of good economic performance and rising asset prices raised our expectations of what is normal," Dr Lowe said.

"I suspect that this is one factor that explains why the public mood has been a bit flat over recent times, despite many observers outside our country viewing the Australian economy with some envy."

"If something happens year after year, there is a tendency to think it can continue to happen and some people start to make their plans accordingly."

Jason Cadden