More Mortgage Rate Pain On Way

Sydney Morning Herald

Monday February 25, 2008

Danny John and Jacob Saulwick

THE big banks are considering a top-up mortgage rate rise in addition to a Reserve Bank-sanctioned increase if, as expected, the official cash rate is lifted by a further 25 basis points early next month.

Having broken ranks with the Reserve Bank twice in successive months, the top five banks are having to contemplate pushing through yet another rate rise as the impact of the global credit crunch on their wholesale funding costs shows no sign of abating.

The Commonwealth, ANZ and St George have highlighted in the past 12 days the continuing pressures on their financing base and indicated that another rate increase could not be ruled out given the difference in interest costs they are having to swallow.

Their position was exacerbated last week with another huge jump in the gap between the official cash rate of 7 per cent and the 90-day bank bill rate - where an additional 76 basis points rise had been priced in by Friday's close.

Market rates jumped almost 20 basis points over a four-day period to 7.82 per cent after the Reserve Bank indicated in the minutes of its latest board meeting that it had considered raising the official rate by 50 basis points to try to quell rising inflation.

That only added to the pressures being faced by the banks, which turn to the wholesale funding markets to finance the difference between what they raise from their large deposit bases and the demand for loans from millions of borrowers.

The global liquidity crisis has significantly lifted the industry's borrowing costs, but after months of containing the increased amounts the banks last month began passing on the additional costs in higher mortgage rates, credit card charges and personal loans.

While united in the need to lift rates, the banks did not raise their mortgage rates by the same amount. National Australia Bank imposed a 0.12 percentage point increase, while ANZ and St George went the highest with 0.2 percentage points. Westpac took the middle line with 0.15 percentage points and the Commonwealth came in the lowest with 0.1 percentage points.

However, the Commonwealth and NAB misjudged the continuing financing pressures and were forced to go a second time earlier this month by 0.05 and 0.04 percentage points respectively when the Reserve Bank lifted the official cash rate by 25 basis points to 7 per cent.

That, in turn, pushed home loans to 9 per cent.

The banks have since learnt following the political and consumer backlash last month that it would be less controversial to lift rates by an additional amount if the Reserve Bank lifts rates by 25 basis points next month, rather than move unilaterally and attract further criticism before the central bank has made its decision.

Nonetheless, the prospect of home loan rates reaching 9.5 per cent this year is now very real, given the outlook for inflation and the pressure on wholesale funding costs.

Last week, the Macquarie Equities analyst Brian Redican said markets were underestimating the risk that official interest rates would hit 8 per cent this year, with the Reserve battling to make a dent in consumer spending buoyed by a healthy labour market and forthcoming multibillion-dollar tax cuts.

Investment bank economists believe another two interest rate rises are needed just to counter the boost to spending of tax cuts scheduled for July 1.

Shane Oliver, the head of investment strategy at the fund manager AMP, warned over the weekend that the pressures on household budgets were now "pretty intense".

A rise in home loan rates to 9.5 per cent would take monthly repayments on a $250,000 mortgage to $300 more than just a year ago, Dr Oliver said.

"Our concern remains that the RBA will end up going too far on interest rates, if it hasn't already, risking a hard landing for the economy in 2009, with households and consumer spending bearing the brunt of the pain," he said.

© 2008 Sydney Morning Herald

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