Tuesday, April 01, 2008

What our banks are doing to their mortgage rates

The St George Bank has leapfrogged the other big banks to push up its mortgage rate to a new high of 9.47 per cent – a full 0.10 percentage points above its next highest rivals – with no end in sight for the increases following an apparent go-ahead from the Governor of the Reserve Bank.

On Friday Westpac increased its rate by 0.10 percentage points to match St George at 9.37 per cent following remarks to a conference by the Governor Glenn Stevens on Thursday who said that it would be be “unrealistic” not expect to banks to lift their rates.

“We have of course seen bank lending rates moving independently of the cash rate. I think that's just life in this environment,” he said.

The Reserve Bank board will meet today to consider its rate settings amid indications that the private banks will continue to leapfrog each other on rates and amongst evidence that the rincreases to date are starting to bite...

Lending figures out yesterday showed that personal borrowings were wound back in February for the second successive month, even before the Reserve Bank's March rate hike and the extra increases imposed by the banks.

It was the first back-to-back slide in consumer borrowings since the recession of the early 1990s.

Business borrowings were sharply lower than expected in February, increasing by just 0.5 per cent in the month, down from 1.5 per cent.

Housing borrowings remained strong, but only for owner-occupiers. The growth in investment loans weakened.

The Housing Industry Association's measure of new home sales fell 5.3 per cent in February, with the sales of home units down 7.5 per cent.

The Association's chief economist Harley Dale said there was no sign of any lift in sales and that this was “little wonder, given that over the space of only seven months we saw a 1.25 per cent hit to the average variable mortgage rate.”

Today's Reserve Bank board meeting will be presented with evidence from the Melbourne Institute showing that inflation is climbing and hit 4.0 per cent last month. The TD Securities – Melbourne Institute Inflation Gauge closely tracks the official figures which will be released in three week's time.

But the senior strategist at TD Securities Joshua Williamson said he did not expect the Bank to react to the news with alarm and push up rates again.

“It is important to recall that the economy and inflation have not yet had time to react to the two most recent official interest rate increases, not to mention the most recent round of unofficial hikes from the major banks and renewed stresses in the global credit market,” he said.

“These are significant economic issues and the Reserve Bank board is likely to see how the economy reacts before contemplating any policy changes.”

There is near-universal agreement that the Bank's board will vote to keep its rates steady when it meets today.

The chief equities economist at Commonwealth Securities Craig James said an extra hike seemed unnecessary.

“The Bank is forward looking, and if it is clear that higher rates are doing their work to slow the economy, then it can remain on the sidelines,” he said.

The Bank will also be also be concerned about financial turmoil caused by the collapse of the stockbroker Opes Prime which went into receivership on Thursday after lenders including the ANZ Bank demanded that it repay more than $1 billion it had borrowed to lend to investors to buy shares.