malcolm edey : opening statement to the senate economics references committee inquiry into matters relating to credit card interest rates opening statement by mr malcolm edey, assistant governor ( financial system ) of the reserve bank of australia, to the senate economics references committee inquiry into matters relating to credit card interest rates, sydney, 27 august 2015. * * * thank you for the opportunity to appear today. i know the committee is interested in a number of different aspects of credit card pricing and regulation, and we ’ ve tried to address those aspects that come within our field of expertise and responsibility in our submission. as we explain in the submission, credit cards have both a payment and a credit function. the regulatory powers and mandate of the reserve bank payments system board ( the board ) relate to the payment function. the board has a mandate to use its powers to promote efficiency and competition in payment systems, consistent with overall stability of the financial system. to that end, the board has for a number of years regulated card payment systems by setting standards in relation to such matters as interchange fees, surcharging and access. as you know, the board is currently undertaking a comprehensive review of those aspects of card payments regulation. i ’ ll be happy to answer any questions you might have today about how that review is proceeding. i know the committee is also very interested in the credit function, and particularly the interest rates on credit cards. that is not something that we regulate, but we have set out in our submission an overview of some of the key facts. if i may, i ’ ll just make a few high - level observations about that before we go to questions. credit card products vary a lot in the interest rates that they charge. some of those rates are very high. they ’ re higher than i think can be easily explained. interest rates of the order of 20 per cent on credit cards are not uncommon. the average rate for borrowers who incur interest on credit cards is currently about 17 per cent. after deducting banks ’ cost of funds and the cost of credit losses, that would equate to an interest rate margin of more than 10 percentage points. my advice if you ’ re in that situation is to shop around. despite the prevalence of high - rate cards, this is a market where there is some significant competition. there are a lot of card products that offer lower rates and special deals for balance transfers. in many cases, cardholders should be able to lower their interest rates by taking

inflation processes have become highly unclear, amidst these uncertainties ; central banks are faced with the need to recognise the importance of inflation perceptions and inflation expectations also, as distinct from inflation indicators. the distinction between inflationary expectations and current inflation perceptions in the context of inflation policy is also worth bearing in mind. furthermore, often than not, the expected change rather than the actual change in real interest rate, following a change in the policy rate, often drives the actions of the economic agents. in this context, credible communication and creative engagement with the market and economic agents has emerged as the critical channel of monetary transmission. the existence of administered prices in commodities critical to inflation expectations, perceptions or indicators complicates the relationship between prices and monetary policy transmission, though the outcome may be socially desirable. third, the presence of administered interest rates, even in segments of a financial system, could hold back appropriate adjustments in real rates as a sequel to changes in the policy rates. the administered interest rates do occur in different forms, instruments and magnitudes but these could be, to some extent, monitored. what is surprising, however, is that the financial market rates could also display somewhat inexplicable impervious behaviour and thereby, act as the source of nominal rigidities in the economy. sometimes, it is described as a conundrum, or might i say " i do not know "? fourth, the central banks are now taking baby steps – sometimes more frequent steps and at other times after a long gap, and in both directions – to respond to, what appear to be, ripples rather than huge waves in the sea of economic activity. further, while what is considered as a “ neutral rate ” of interest, in the present period, appears to be much lower compared to several years before, the issue is whether the neutral rate in respect of the emerging market economies, which has been coming down in tandem with global rates, will tend to be distinctly higher than in the developed economies. fifth, if the domestic inflation rate of an economy, however low it may be, is higher than the average inflation rate of its trading partners, it puts pressure on the exchange rate. in this context, the question of simultaneous balance of the internal and external sectors becomes a major issue if the flexibilities in the economy are less than adequate. the conduct of monetary policy inevitably involves a careful judgment on the relative weights assigned to the domestic and the global factors and constant reassessment and rebala