Rates Grip

The Age

Saturday March 8, 2008

Leon Gettler

Official rate rises are only the start as the big banks show they're not afraid to go a few points higher, writes Leon Gettler.

ANZ boss Mike Smith has flagged cutbacks to loans and a rate increase next week above the Reserve Bank's quarter-percentage-point increase.

And the banks, he said, had good reason to push rates up and ration credit to home and business borrowers, something he acknowledged would affect the broader economy.

"The fact is, turmoil in global credit markets means the cost of funds has gone up over and above the Reserve Bank's increase," Mr Smith said.

"I don't recall too many people saying that bakers shouldn't put up the price of bread when the cost of flour rises. So the debate around this issue is quite strange, as it would be to most people who want to run a sustainable business.

"Certainly, I believe the increase we pass on will have to strike a balance between the additional increase in funding costs and what we pass on to customers and what we absorb ourselves."

Mr Smith declined to elaborate when asked later how much of an increase ANZ would need to cover its costs.

"When we move on rates, we will let you know how we calculated that," he said.

His comments come after National Australia Bank created a political problem for the sector by lifting its mortgage rate by 0.29 of a percentage point, four basis points above the RBA's 0.25-percentage-point increase.

Analysts expect all the banks will follow suit to claw back their costs.

But NAB's announcement has left ANZ and the other banks confronting a difficult question: how to sell an increase higher than the official rate rise to the RBA, Treasury and Treasurer Wayne Swan.

Bank insiders say increases higher than NAB's rise would now be harder to justify.

Still, that did not stop Westpac yesterday coming out with an increase of 0.3 of a percentage point, taking its standard variable rate to 9.27% from Tuesday.

Like NAB, Westpac says the additional charge does not recover the full cost. It says it will make further adjustments if conditions do not improve.

And earlier this week, St George chief executive Paul Fegan dropped a hint that his bank was considering a 40-point rise. Adelaide Bank was the first to go above the official rate rise, increasing the cost of funds it supplies to its 35 mortgage brokers and originators by 40 basis points.

Mr Smith said ANZ was paying more than 50 basis points extra for wholesale funding compared with a year ago.

Speaking to the Australian British Chamber of Commerce, he said the cost of funds was well over the RBA increase, credit costs were rising - and getting tighter - and business confidence was on the slide.

"One of the many things I believe is missing from the debate is that if we can't properly reprice lending, there is a real risk banks will ultimately be limited in the amount we are able to lend customers to buy houses or to expand their businesses."

He said signs of that were already appearing, with Macquarie Group's decision earlier this week to become the first prime lender to scale back its mortgage business.

"These are factors that are bound to affect the level of activity in the economy."

Mr Smith acknowledged later that the repricing of lending, by slapping down a higher interest rate and cutting back on credit, basically amounted to the same thing. But the existing model needed to change.

"You can't on one side be spending more to raise the money and not earn it on the other side of the balance sheet. It's just not sustainable business," he said.

His comments follow observations from RBA assistant governor Guy Debelle this week that unstable credit markets could force banks to wind back the amount of credit they offered.

Mr Smith said the central bank's use of 12 rate rises as an instrument to cool down the economy had placed a considerable burden on Australian households trying to manage already stretched budgets.

"You can't keep having interest rate rises and expect things to remain constant. There will inevitably be a deterioration in areas."

As a result, he said, questions needed to be asked "whether other instruments of economic policy could also play a role in containing and reversing inflationary pressures".

"The banking system itself, because of the cost of funding now, will provide a sufficient brake to the economy if you just allow those rates to flow through," he said. "I don't think you need direct intervention right now."

LINK

? www.anz.com

© 2008 The Age

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