Why the big banks will keep their rates steady too: Bartholomeusz

The Reserve Bank did as was predicted by most in the market and left official rates unchanged. Now there’ll be a still novel wait to see whether the major banks do the same.

Last month of course, long-standing practice was broken when the ANZ, acting on its new policy of determining its mortgage rate independently of the RBA, raised its home loan rate by a modest six basis points despite the RBA sitting on its hands and was promptly followed by 10 basis point increases by Westpac and Commonwealth and nine basis points by NAB. 

Friday week, ANZ’s interest rate committee will meet according to its new schedule of the second Friday of each month to decide whether or not to move again. Logically ANZ’s peers should wait to see whether or not it does. First movers tend to attract a disproportionate share of the odium.

While there might be a temptation to tinker with the rates and add a few basis points to play catch up with its peers – and reinforce the message to its customers that its rates may now move, in either direction, independently of the RBA’s decisions on official rates – ANZ would be reluctant to ignite another bout of bank-bashing.

The majors’ fiercest critic, Wayne Swan has been diverted into beating up on some hapless mining billionaires who had the temerity to criticise the world’s greatest treasurer publicly (their less wealthy and more timid peers sensibly tend to say similar things in private) so why re-direct his ire to the banks?

More to the point, while – as the RBA noted again today – bank funding costs remain higher, relative to benchmark rates, than they were in the middle of last year, they have fallen back somewhat from their levels earlier this year and the banks did have their little out-of-cycle rate rises last month to relieve some of the pressure on their net interest margins. They have also been finessing deposit rates and business loan rates.

With demand for credit remaining weak the banks will also be conscious that they wouldn’t want to drive down that demand any further by raising rates unnecessarily. The marginal home loan remains, however, very marginal from their perspective.

Perhaps more encouragingly for the banks, the RBA did note that having fallen (albeit in a gentle and orderly fashion) through 2011, there are some signs that housing prices are stabilising within a still-soft market.

The RBA was also relatively sanguine about the international environment – still a major determinant of their access to and cost of wholesale funds – and noted that capital markets were again supplying funding to companies and well-rated banks.

The RBA said recent information was consistent with the expectation that the world economy would grow at below-trend pace this year but did not suggest a deep downturn was occurring. It referred to a considerable easing of the acute pressure on European banks as a result of the actions taken by policymakers – presumably the massive infusions of extremely cheap liquidity from the European Central Bank.

It hasn’t, however, ruled out Europe as “a potential source of shocks for some time yet”. If there’s another flare up in Europe, and funding markets seize up or wholesale funding costs spike again, the pressure on the banks to move in the opposite direction to the RBA – which referred today for the scope to further ease monetary policy given the benign outlook for inflation – would once again mount.

This article first appeared on Business Spectator