Fewer Seek Loans As Rates Edge Up

Sydney Morning Herald

Thursday July 10, 2008

Jessica Irvine Economics Correspondent

MORTGAGE holders have a nervous wait to see if the big four banks follow in the footsteps of smaller lenders St George and BankWest, which have increased their variable lending rates independently of the Reserve Bank.

The governor of the Reserve Bank, Glenn Stevens, said last night that the cost of funds on wholesale markets, where banks source some of their funding, was still above levels seen before the credit crunch. Banks might seek to pass this continuing higher cost on to borrowers.

But official figures released yesterday show higher interest rates and petrol prices are sapping demand for loans. The number signed each month has fallen 23 per cent in the four months to the end of May. This could make banks think twice before raising borrowing costs again.

BankWest raised the interest rate on its standard variable home loan yesterday by 0.2 percentage points to 9.55 per cent. This puts it behind St George, which moved to 9.67 per cent last week, but ahead of the four majors, whose lending rates vary between 9.44 and 9.47 per cent.

A spokeswoman for BankWest, Sally-Ann Parker, said the increase was in response to the higher cost of funding. "Like all banks, we're feeling the cost of funding," she said.

Mr Stevens said last night that financial markets were witnessing "one of the most acute withdrawals in confidence between major institutions in living memory".

"Australia has suffered less than the United States, Europe or the United Kingdom, but nonetheless term funding spreads increased and remain today higher than they were before the onset of the subprime crisis last August."

An economist at ABN Amro, Kieran Davies, said banks were still feeling the pinch of higher costs, and could be forced to raise rates.

Yesterday's lending figures show banks have increased their market power against smaller non-bank lenders - which have lower deposit bases and suffer more from rising lending costs - putting them in a better position to dictate higher rates. For the first time since 1994, banks wrote more than 90 per cent of all owner-occupier loans.

But the head of research at the research group Infochoice, Steven Anderson, said the bigger banks could choose to continue gaining market share by not raising rates: "I don't think they'll jump straight away."

An analyst at Austock Securities, John Buonaccorsi, said the premium paid by banks for wholesale funds had halved since the worst days of the credit crunch, making it less urgent for them to raise rates. "I'm not saying that the credit crunch is going away, but it's not getting any worse."

While yesterday's increase by BankWest had probably increased the chances of a move of 0.1 percentage points by the big four banks, "I still see the likelihood as slim - I just don't think that the big banks can justify further hikes, given that funding markets have calmed a little since March," Mr Buonaccorsi said.

The slump in home lending is further evidence for the Reserve Bank that its interest rates medicine is working. Most economists expect the Reserve to keep rates on hold for the foreseeable future. Some tip rate cuts next year.

Official jobs figures due today are expected to provide some further clues. Employment fell for the first time in nearly two years in last month's reading, but economists are tipping a small recovery in today's figures.

© 2008 Sydney Morning Herald

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