Banks face pressure over cost of lending and look likely to raise rates

By BY Scott Murdoch, From: The Australian, 13 July 2010

AUSTRALIA'S biggest banks could be forced to raise interest rates independently of the Reserve Bank to cover higher funding costs.

But it is not likely to happen until after the federal election.

Cost pressure facing the big banks was highlighted by Westpac's move in late June to raise $800 million in five-year funding at 35 basis points more than a similar deal seven months ago.

A report by Macquarie Equities Research shows the banks could justify increasing their standard variable lending rates, but were likely to be dissuaded by the political environment.

Australian home loan numbers rose sharply by 1.9 per cent during May.

The average loan size fell by 1.3 per cent, but the number of new loans grew despite higher interest rates.

The major banks have become a target of Wayne Swan, who has heavily criticised rate moves outside of the RBA cycle, or moves higher than the central bank's decisions.

The banks have tentatively agreed to restrict rate rises to the RBA's official moves in the short term, but are expected to move after the election, which could be called as early as this week.

Macquarie analyst Michael Wiblin said National Australia Bank could be the first to lift rates after the election because its 7.24 per cent standard variable rate was the lowest of the four majors (by 12 basis points).

"The sensitivity around mortgage repricing over the last six months is due to the election," Mr Wiblin said.

He said said the Australian banks had not been able to follow the global trend of retail banks, especially in Britain, increasing standard variable rates to absorb higher funding costs.