Finance News: 03 Feb 2010
THE Reserve Bank's decision to hold the official cash rate has placed the big banks in something of a dilemma...
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As much as it may encourage consumers to take out new loans and stimulate additional business, it robs the banks of an opportunity to quietly raise rates on products such as business loans and credit cards that don't attract as much attention as the cost of mortgages.
Not that any of the big four were likely to repeat the brand-damaging higher move by Westpac in December when the RBA last raised the official cash rate by 25 basis points.
The bank's 45 basis points rise and the controversy generated by its comparison with the price of a banana smoothie caused such a public relations backlash that a home loan rise on that scale is now very unlikely.
By all accounts, the banks were ready yesterday to lift mortgage rates by no more than the amount economists had expected from the RBA. Robbed by the central bank of the necessary cover to do that meant they had no choice but to keep on hold their own standard variable mortgage rates, which stand at between 6.49 per cent (NAB) and 6.76 per cent (Westpac).
More importantly for them, it will now be harder for the majors to claw back the increases in wholesale funding costs (the money they borrow from domestic and international credit markets) that continue to affect their own loan books.
With credit spreads still under pressure and new longer-term borrowing costing more to replace than the cheaper old debt that is now up for repayment, the banks have been passing on a fair chunk of that additional expense to consumers.
As the RBA pointed out yesterday, one of the prime reasons for it not raising the cash rate this time is that the banks have helped its fight against inflation by lifting home loans by around one percentage point compared to the 0.75 per cent at the official level. (No mention, of course, of the benefit to the big four's profits which are forecast to hit a combined $19.4 billion this financial year).
In the meantime, while there is no mortgage rate hike on this occasion to take the political heat of any rise in consumer borrowing costs, industry observers will be closely watching business loans and credit card rates to see how the banks respond in coming weeks.
This will be of particular significance given that they also won't be able to use the argument of having to wear a costly hike in their deposit account rates to attract savers whose money the banks then recycle to help underwrite more loans.
And so it goes on.
SOURCE: Danny John - Sydney Morning Herald
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