Big four banks face mounting pressure to lift interest rates
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Australia's largest banks may be forced to impose "out of cycle" mortgage rate hikes as global interest rates push higher.
There is speculation they cannot afford the political fallout of raising interest rates while the banking royal commission is underway.
But JP Morgan's chief economist Sally Auld disagrees with the argument that the political cost would be "too high" for the big four banks.
"What that [view] ignores is the fact that they're businesses with a clear commercial imperative, at the end of the day, they care about their margins and preserving it," she said.
They have to "make a call on whether the political heat they'll get is any worse than the cost to margins of not lifting rates."
Ms Auld's view is consistent with what ANZ's chief executive Shayne Elliott told ABC's The Business last month.
"The reality is we have to run our business," he said.
"As long as we make decisions responsibly, ethically, looking at all the stakeholders, we'll make decisions as appropriate for the time."
Smaller banks not afraid of rate hikes
The big four would certainly be in good company as several of the smaller banks have already lifted their annual home loan rates, including:
- AMP Bank: +0.4pc (new variable interest-only loans)
- Auswide Bank: +0.13pc (investment loans) and +0.05pc (owner-occupiers)
- Bank of Queensland (BoQ): +0.15pc (variable interest-only) and +0.09pc (variable principal and interest) for owner occupiers
- IMB Bank: +0.08pc for new and existing mortgages
Suncorp also raised its annual lending rates by 0.12pc for variable interest-only mortgages, but it did it three months earlier than the most recent batch of banks.
Why are the rate hikes 'out of cycle'?
Until the global financial crisis, retail banks tended to raise or lower their lending rates in line with the Reserve Bank's interest rate cycle.
But the RBA has kept the official cash rate on hold at record lows for the past 20 months as the nation's economy fails to improve quickly — and a commonly-held expectation is that it will not lift rates for the next one to two years, or even longer.
While that is occurring, the banking industry has faced increasing stress on its net interest margins (which is essentially the difference between a bank's interest income and the amount of interest it pays out to lenders).
The banks blame this on their surging short-term borrowing costs, in particular the sharply rising 90-day bank bill swap rate (BBSW).
Basically, it is the rate at which banks will lend unsecured money to each other for a three-month period.
This is evident in the widening spread between the BBSW and the RBA's official cash rate (1.5 per cent).
"If the banks want to preserve their margins, the only way to reflect that is [passing on] higher borrowing costs to their mortgage holders," Ms Auld said.
The BBSW exceeded the RBA's rate by about 30 basis points (0.3pc) back in February — now that gulf has widened to 66 basis point (0.66pc).
One reason that the banks face surging short-term borrowing costs is the Federal Reserve and European Central Bank's policy direction to tighten their monetary policies.
In other words, the US and Europe want to slowly wind back the "easy money" which helped stimulate their economies in the wake of the global financial crisis.
"Australia is a jurisdiction where we rely on foreign capital to help fund our economy because we have a shortage of savings relative to investment," Ms Auld said.
"You could make the case that the withdrawal of that liquidity hurts markets where we're reliant on foreign capital."
What do the banks say about the rate hikes?
BoQ's acting head of retail banking Anthony Rose has justified the need for the out of cycle rate hikes:
"Funding costs have significantly risen since February this year and have primarily been driven by an increase in 30 and 90 day BBSW rates, along with elevated competition for term deposits," he said.
"While the bank has absorbed these costs for some time, the changes announced today will help to offset the ongoing impact of the increased funding costs."
In a statement, IMB also justified the necessity of increasing lending costs:
"Like most banks, we use our customer's deposits to fund the loans we make to our borrower members and we pay interest to attract and use these deposits.
"Over the last few months, the cost of this money has increased and as a result we are having to pass on some of this increased cost."
Auswide's managing director Martin Barrett also regrets increasing the mortgage rates.
"We're not profiteering from this, as we're still making a mild loss," he told the ABC.
"I'm hoping they [the bank's borrowing costs] will start to level out soon."
Mr Barrett concedes that if the BBSW continues to rise above the RBA's cash rate, it may be difficult to justify further mortgage rate increases.
He also did not rule out the possibility his bank might be forced to absorb the further costs.
Topics: business-economics-and-finance, company-news, banking, economic-trends, australia
