Wednesday, October 14, 2015

Just 'cos Westpac raises rates... A Reserve Bank rate cut is no sure thing

Steady on. It's far too early to predict a rate cut in November. And that isn't just because the Reserve Bank genuinely hasn't considered the question and won't until shortly before its November meeting.

Macquarie Group's interest rate analyst James McIntyre thinks the RBA will cut rates because Westpac has pushed them up. It's "all but a done deal", he says.

It's true that if all of the lenders lifted their retail rates by 0.25 points, the Reserve Bank would be likely to cut its cash rate by 0.25 points.

Governor Glenn Stevens has said often in the past that the bank targets retail rates and uses its cash rate as merely a means to get at that end. If the retail banks push up or push down rates on their own, the Reserve Bank will push down or push up its cash rate to compensate.

But Westpac is only one of the big four banks, and the big four between them control only around 80 per cent of the mortgage market.

Its decision to lift its variable mortgage rates by 0.20 points might only affect one quarter of the market, perhaps less.

And it's only lifted them on products with the Westpac brand. For the moment products branded St George and Bank of Melbourne are unaffected.

Treasurer Scott Morrison has forcefully made the point that Westpac's hike is more than would be needed to compensate it for new rules that will push up its cost of capital.

If he succeeds in dissuading others from following it, the Reserve Bank is unlikely to move in November. Westpac's move will feed into the mix of factors to be considered, but in a small way.

In The Age and Sydney Morning Herald