Big four lose chance to cash in on other rates
By Danny John | smh.com.au | 03 February
The decision by the Reserve Bank to hold the official cash rate steady has given the big banks that dominate the lending scene a dilemma.
As much as it may encourage consumers to take out loans and may stimulate extra business for the banks, it robs them of an opportunity quietly to raise rates on products such as business loans and credit cards that do not attract as much attention as the sensitive cost of mortgages.
Not that any of the big four were likely to repeat the damaging move by Westpac in December when the Reserve last raised the official cash rate by 25 basis points.
While it is yet to cost Westpac large amounts of new lending business, according to the latest data, the bank's 45-basis point increase and the controversy generated by its comparison with the price of a banana smoothie caused such a backlash that a home loan rise on that scale - at least in a federal election year - is unlikely.
By all accounts, the banks were ready yesterday to lift mortgage rates by no more than the same amount as the Reserve was expected to do, so they were as surprised as anyone when it did not.
But, robbed of the necessary cover to do just that meant they had no choice but to keep their standard variable mortgage rates - now between 6.49 per cent (National Australia Bank) and 6.76 per cent (Westpac) - on hold.
More importantly, it will now be harder for the big banks to claw back the rises in wholesale funding costs - the money they borrow from domestic and international credit markets - that are continuing to affect their loan books.
With credit spreads still under pressure and new longer-term borrowing costing more to replace the cheaper old debt that is now up for repayment, the banks have been passing on a fair chunk of that extra expense to protect their profit margins and keep shareholders happy.
As the Reserve said yesterday, one of the prime reasons for its not raising the cash rate is that the banks have helped its fight against inflation by lifting home loans by about 1 percentage point compared with the 0.75 per cent at the official level.
(No mention, of course, of the benefit to the big four's profits, which are forecast to hit a combined $19.4 billion this financial year, although the Reserve is watching bank margins closely to counter claims of gouging.
In the meantime, while there is no mortgage rate rise this time to take the political heat of any increase in consumer borrowing costs, observers will be closely watching the price of business loans and credit card rates to see how the banks respond in coming weeks.
This will be of particular significance given that they also will be unable to use the argument of having to wear a costly rise in their deposit account rates to attract savers whose money the banks then recycle to help underwrite the demand for more loans.
And so it goes on.
First published by Smh.com.au on February 03 2010
Visit smh.com.au for the latest news updated throughout the day
