Economists tip another rate rise in February as Westpac jacks up mortgage rates by 0.45%

Swan accused Westpac of “cynically trying to use the cover” of the Liberal leadership stoush to hit its customers with a rise that could not be justified.

“I think Westpac and any other bank that follows Westpac’s lead can expect a very severe backlash from their customers and from the community generally,” he told reporters.

But Westpac says the move was regrettable, but blamed the decision on increasing wholesale funding costs.

“Westpac has withheld passing on the full amount of the increased funding costs we have experienced to ensure we could continue to support our customers through the economic downturn,” the bank said in a statement.

Australia’s other banks are yet to announce whether they will pass on the RBA rate rise or follow Westpac’s lead with higher-than-expected rate rises.

Not surprisingly, business groups were unimpressed with the RBA’s move.

“This all has a direct and real impact on retailers looking to give their businesses a boost after a very trying year of patchy sales,” ARA executive director Russell Zimmerman says.

“Instead of letting retail recovery gain some much needed momentum over the Christmas and post-Christmas trading period, the RBA is taking cash away from consumers at the worst possible time.

AIG Group chief executive Heather Ridout described the move as “surprising”.

“While we accept that the monetary stimulus will need to be wound back, the Bank has 50 points locked in and could have afforded to take a pause until the New Year when the business outlook is clearer.”

But economists seem pretty certain of the New Year outlook – with no RBA meeting in January, most are tipping another 25 basis point rise in February.

“With the next Board meeting scheduled for February 2, the Bank now has ample time to assess the impact of its ‘material adjustments’ before moving again,” Westpac chief economist Bill Evans says.

“However, the key point remains that rates are still firmly in the expansionary zone, and not consistent with a central bank which believes that growth is returning to trend while inflation remains above the target band.”

CommSec chief economist Craig James says the impact of the rate rise on households’ budgets should be reasonably limited.

“The latest rate hike will have its greatest impact on consumer sentiment and psychology rather than on household finances. According to the Commonwealth Bank more than 90% of its home loan customers are ahead in their loan repayments. And while those who have taken out loans in the past six months may be up for higher repayments, few could say that they didn’t see it coming.”

“Aussie consumers have become more conservative, preferring to use their own funds (debit cards) when shopping rather than credit. And the latest lift in interest rates is likely to further entrench that conservative behaviour. Retailers will need to keep prices low to encourage consumers to part with their cash.”

But James says more rates pain is ahead. He is tipping 25 basis-point hikes in February and is also forecasting rate rises in June, September and October.

That would take the official cash rate back to 5.25% by this time last year.