Big Banks' Interest Moves Take Heat Off Reserve

The Age

Saturday July 12, 2008

Scott Murdoch

THE decision yesterday by two of the Big Four banks to increase home loan rates independent of the Reserve Bank reduces the chances of the central bank taking monetary policy action for the rest of this year.

CBA, the bank with the largest home loan book, has increased its standard variable rate by 14 basis points to 9.58%. ANZ increased its rate 15 basis points to 9.62%.

It seems CBA, even though it has the highest rate of retail deposits, has not been able to withstand the forces of the international funding markets.

In late April it said it would not raise rates after National Australia Bank and ANZ did

to snare more of the lending market, particularly business banking, and to take advantage of the reputational hole ANZ found itself in after the Opes Prime debacle.

The strategy may have backfired. CBA is now near the top of the market with 9.58%, ahead of NAB and Westpac, which hover around 9.46%. ANZ is worse off at 9.62%.

The banks always face a tough task selling decisions like these to customers, particularly those experiencing mortgage stress and high petrol and food prices.

Ross McEwan, a CBA executive, said funding costs were up to 100 basis points higher now than this time last year. Still, increasing lending rates is hard to justify after a level of relative calm has returned to money markets. In Australia, the 90-day bill rate has retreated from a peak of 8.11% to 7.75%. But it is elevated from its low of 7.33% before the credit crunch emerged. It is still 50 basis points above the official cash rate of 7.25%. Even before the latest round of rises, banks had increased their rates by 40 to 60 basis points above the RBA's rises.

One slight positive is that the increases take pressure off the RBA to raise again, because the retail banks are effectively doing its job. If the other major banks move, which is likely, an effective rate rise will have been delivered to most borrowers.

The market has priced the chance of another RBA rate move by December at 20%, compared with 80% factored into pricing in the past month.

"CBA is one of the largest home lenders and I think it will take the pressure off the RBA, because I think it will help slow domestic demand further," Joshua Williamson of TD Securities said.

"For the RBA, we think the next move will be down. That's not in the market's pricing at the moment, but I think that will change. I think the market is going to be more focused on the outcome of all of the activity data."

smurdoch@fairfax.com.au

© 2008 The Age

Back to News Index | Back to Home