Banks unlikely to raise interest rates for home borrowers: RateCity’s Damian Smith

RateCity CEO Damian Smith has downplayed the risk of banks raising mortgage rates, but he says anything is possible.

“It’s been an extraordinary last 48 hours. Twenty-four hours ago we were expecting banks to pass on 10 to 15 basis points of a 25-basis-point rate cut, now they’re pushing the line of a rate rise,” Smith tells Property Observer.

“Nothing surprises me anymore, but I would be surprised if they raised rates at time when lending growth is slow. The big issue is not funding cost but the slow lending market,” he says.

If banks do raise rates, Smith says they will be banking on “inertia from customers” and assuming that they won’t switch lenders.

“It’s up to customers to demand better and be ready to switch,” he says.

His comments follow speculation that the major banks could raise rates independent of the Reserve Bank in order to protect their profit margins on mortgages.

Borrowers should know by Friday whether their mortgage repayments will rise when ANZ makes its independent interest rate announcement.

Should ANZ push up its standard variable mortgage rate, the other banks are likely to follow suit.

Alan Mitchell, finance editor at the Australian Financial Review, says “conventional wisdom” dictates that ANZ will not raise rates after the RBA left them unchanged.

“To do so would be much more?provocative than the banks’ preferred strategy of simply not fully passing any RBA rate cut to its customers,” he says.

The banks were expected to pass on only part of an expected 25-basis-point interest rate cut yesterday – effectively increasing their net interest margins – but they and most economists were stumped by the RBA’s decision to keep rates on hold for another month.

Commonwealth Bank chief economist Michael Blythe speculated that the RBA could hold off on cutting rates again until May.

ANZ head of Australian economics Katie Dean says the risks have risen that the cash rate will remain on hold “well into the second quarter”.

Westpac chief economist Bill Evans remains hopeful that the RBA will hope “adopt a more appropriate policy response over the course of the next few months beginning with a 25-basis-poing rate cut on March 6” but acknowledges that the bank “does not provide strong encouragement to expect a cut in March”.

Yesterday the RBA noted an improving situation in Europe following the intervention of the European Central Bank in December, but a new report by Moody’s lists Australia alongside New Zealand, Korea, and Vietnam as the Asia-Pacific economies most at risk from a collapse in Europe and says further deterioration of the property market is a “menacing risk” facing the economy.

A fall in house prices would impact on foreign investor confidence in Australian property and make it more expensive for banks to raise money offshore, Moody’s has warned.

NAB released its quarterly results yesterday revealing unaudited cash earnings of $1.4 billion, but the bank highlighted “higher deposit and wholesale funding costs”.

“Higher deposit and wholesale funding costs, softening credit growth and fragile economic conditions continued to be key characteristics of the operating environment in most of the regions in which NAB operates,” said National Australia Bank Group chief executive Cameron Clyne.

The other major banks have beat a steady drum about rising wholesale funding costs while the Australian Bankers’ Association last week put out a statement on “how bank funding works and why banks are under funding cost pressures”.

After Westpac announced it would cut about 560 jobs last week, CEO Gail Kelly said that while a cataclysmic collapse in Europe was off the table risks remained elevated and  “if anything they are higher now than they were at any times during the entirety of GFC”.

Kelly also would not commit to pass on any future rate cuts.

NAB has pledged to keep offering the lowest standard variable rate of the four major banks.

If ANZ raises its mortgage rates, NAB could also push up its rates and still continue to offer the lowest interest rate of the big four.

Standard Variable Rate p.a. 7 February 2012

NAB

7.22%

ANZ

7.30%

CBA

7.31%

WBC

7.36%

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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