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Interest rate cut believed to have been triggered by one large bank suggesting a dramatic growth in bad debts

RICHARD PALFREYMAN: The real reason why the Reserve Bank decided to ease interest rates this week rather than next. On the face of it, next week after the release of current account and consumer price figures would have seemed more sensible for a Reserve Bank concerned not to encourage a resurgence in spending until it was sure the time was right. It made the move this week because it received confidential information from one of Australia's biggest banks pointing to a dramatic growth in its bad debts. This report from our economics correspondent, Peter Martin.

PETER MARTIN: Two or three weeks ago, top officials from the Reserve Bank held a series of meetings with very senior executives from each of the big four consumer banks. Attending in person were the Governor of the Reserve Bank, Bernie Fraser and the Deputy Governor, John Phillips. There's nothing terribly unusual about that sort of meeting - it happens from time to time. What was different this time was a written request to the banks asking each to provide in writing, before the meeting, information about their lending and balance sheets. Banking sources say that at one or more of these meetings, at least one of the big four banks argued that so-called loan delinquencies, or bad debts, had grown dramatically over Christmas. If interest rates weren't cut swiftly, the bank is alleged to have warned, there would be an inescapable recession. A delay of even one week in cutting interest rates would be too long.

That wasn't the position of all of the banks who met the Reserve but it was the trigger that led to yesterday's unprecedented announcement. The so-called hawks in the Treasury who usually argued for continued high interest rates were on holidays. The hawks in the Reserve Bank fought a losing battle arguing as a fall back position that if interest rates were to be cut they should be cut only slightly and without a public fanfare. John Phillips the Deputy Governor, is more of a hawk on that question than Bernie Fraser, personally appointed to the job by Paul Keating. The warning Bernie Fraser had received from the banks happened to strike a sympathetic chord with Mr Keating, who wanted an early cut in interest rates anyway, for his own political reasons.

The ground work was laid on Friday. Every Friday the Reserve Bank accepts so-called inter-bank deposits from each of the private banks. It usually does so for periods of seven days. On Friday, it accepted for a period of only four days, meaning that all of the deposits would expire and turn into cash on Tuesday, the day planned for the big announcement if it got through the Reserve Bank's board meeting on Monday. It did get through - Mr Keating says the vote was unanimous, and on Tuesday morning, anecdotal evidence from dealers suggests that the Reserve Bank dealers pointed out to private dealers that there was a lot of cash in the system that should lead to lower rates. 'What are you waiting for?' one of the Reserve Bank dealers is supposed to have said to one of the private dealers. Well, the dealers did bid down the rates and now they're waiting for the bank's next move. That's not likely for about a month when the Reserve has a full set of monthly statistics on which to judge the effect of this month's move. If there is another cut, then it would be towards the end of February, just in time to assure the banks that they're safe to cut home mortgages by March 5, the last date on which the Government can safely call an April 7 election.

RICHARD PALFREYMAN: Economics correspondent, Peter Martin.