Reserve Bank holds steady but banks may move

By David Uren, The Australian, 2 September 2009

A HEAD of steam is building for a round of interest rate rises, with banks battling rising funding costs and set to raise mortgage rates regardless of whether the Reserve Bank pushes up the official rate next month or not.

The RBA board decided to hold the official cash rate at its 40-year low of 3 per cent for the sixth month in a row at its meeting yesterday.

However, it is set to start pushing rates higher if, as seems increasingly likely, retail sales and jobs growth remain strong, The Australian reported.

Wayne Swan welcomed the board's decision, but sought to prepare the electorate for rate rises, quoting Reserve Bank governor Glenn Stevens's comment that rates were at emergency levels.

The Treasurer added: "Of course, at some stage in the future they can be expected to move."

Mr Stevens declared yesterday that the world economy was pulling out of recession, while the Australian economy was getting stronger than the bank had expected.

Anticipating a move by the Reserve Bank in October, financial markets have been pushing up the rate on 90-day bank bills, which provide the base for bank funding.

With competition among the banks for deposits also heating up, pushing at-call rates as high as 5 per cent, the banks are getting closer to raising mortgage rates, regardless of the Reserve Bank's action.

Andrew Willink, chairman of the interest rate monitoring agency Rate City, said yesterday: "It is likely that banks will move to increase variable rate to some degree in the very near term."

Since the beginning of August, the 90-day bank bill rate has risen from 3.2 to almost 3.5 per cent. "The banks can wear the gap for a certain amount of time, but when it continues to be more expensive, it eats into margins considerably," he said.

An ANZ spokesman said there were no plans to raise variable mortgage rates independently of the Reserve Bank, but he confirmed the pressure on funding costs and noted that the bank had already raised rates on its fixed-rate mortgages.

Commonwealth Bank chief executive, Ralph Norris, said last month the bank would adjust its mortgage rates based on its own funding costs, rather than automatically following the Reserve.

The major bank (standard variable) mortgage rates are currently between 5.7 and 5.8 per cent.