Banks' Mortgage Rate Hike Puts Pressure on RBA
The Reserve Bank of Australia may have to consider a rate cut as early as next month, in response to the recent hike in mortgage rates by the country's major banks.
The Reserve Bank board next meets on November 3 - Melbourne Cup Day.
Last month the RBA strongly rejected comments by ANZ chief economist Warren Hogan, that he expected a further two cuts in interest rates next year, to offset the 'economic challenges' in China.
ANZ issued a new interest rate outlook that suggested 50 basis points of interest rate cuts in 2016, starting in February.
RBA governor Glenn Stevens said the economy was recovering, albeit slowly, so further interest rate cuts would not be necessary.
What he didn't count on, however, was that Australia's Big 4 Banks - NAB, ANZ, Westpac and Commonwealth - would raise mortgage rates independently of the central bank.
The Big 4 have blamed their increases on policies requiring major banks to hold larger equity capital buffers, which make banks more resilient to shocks.
The lenders argue they are passing on this cost to customers, saying shareholders should not wear all the costs of a safer banking system.
They say they are merely "recouping" their costs. But analysis by Deutsche Bank suggests something very different. It says the banks will actually improve their profits by between 2% and 3%.
For CBA, which posted a $9.137 billion cash profit for the year to June, the hike will see it make an extra $30,000 an hour profit, every day! That's around $274 million over a year.
AMP chief economist Shane Oliver has suggested that shareholders in banks may need to lower their expectations for returns as banks become less risky thanks to government policy changes.
He said the banks' mortgage rate increase would add pressure to the RBA to lower official interest rates, in the hope that a reduction would be passed on to borrowers. This would limit the effects of the commercial banks' rate rises on consumer confidence and spending.
Dr Oliver also believes the Reserve Bank may be concerned that a further cut in official rates could reignite activity in the housing market, raising risks to the economy.
It's certainly unlikely that the RBA will want to see households paying higher mortgage rates at the moment, given the risk this will pose to consumer spending at a time when economic growth is still weak.
Treasurer Scott Morrison described the banks' interest rate moves as "commercial decisions", but also highlighted the "handsome" returns banks make.
We can only wait with bated breath until Melbourne Cup Day to see what happens next.