Friday, November 20, 2009

Green light - Reserve gives banks the all-clear to nudge up rates

The Reserve Bank has given Australia's banks a green light to top up their mortgage rates declaring that their mortgage margins "have actually declined a little over the past two years".

The assessment by Reserve Bank Assistant Governor Guy Debelle delivered to a banking conference in Sydney is at odds with jawboning by the Treasurer who has attacked banks over attempts to widen their margins.

Mr Debelle told the financial services forum that as the Bank saw it, "margins on variable rate housing lending relative to bank funding costs have actually declined a little over the past two years".

While acknowledging that the margin between standard variable home loan rates and the Reserve Bank's cash rate had widened as banks held on to some of the Reserve Bank's official interest rate cuts, he said that was only part of the story...

When all of their mortgage funding costs were taken into account "their overall margin has declined".

When the Commonwealth Bank attempted to claw back some of its margin in June and lifted its standard variable mortgage rate from 5.64 per cent to 5.74 per cent to bring it into line with the National Australia Bank Wayne Swan said it was unjustified and could endanger the effort needed to sustain economic recovery.

"I think we can really see as we’ve been through this difficult period over the last six months or so what Australians can do when we all work together," he said after the bank's move. "Which is why it has been so disappointing to see this decision from the Commonwealth Bank to raise interest rates. I don’t believe that decision is justified, and I believe that if any other bank were to take a similar decision, there would be understandable community outrage."

His words appear to have had an effect. No bank has since attempted to push up its standard variable mortgage rate by more than increases in the Reserve Bank's cash rate.

But the Reserve Bank's new assessment - opposed to the Treasurer's - suggest such a move could be justified and will make it harder for the Mr Swan to argue against future independent rate hikes.

The Bank believes the banks including Westpac, the Commonwealth, the ANZ and National Australia are paying more for money sourced from overseas and are paying substantially more for Australian deposits.

Its quarterly review released earlier this month noted that the average rate offered by the major banks for so-called term deposit specials had "risen by 0.72 percentage points since July to 5.43 per cent, and is up about 1.75 points since early 2009."

The Reserve Bank has pushed up its cash rate twice since it started tightening, and on neither occasion have the big banks used the opportunity to push mortgage rates up further and recoup lost margins.

It's likely to next push up rates after its meeting in December or in February.

Dr Debelle told the conference the private banks gentle treatment of mortgage holders had been "more than offset by a widening in business and personal loan margins, so that overall bank margins have widened, as is evident in the banks’ most recent profit statements."

Mr Swan is understood to continue to believe that there is no justification for the private banks to push up rates outside of Reserve Bank movements.

Published in today's SMH and Age

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