Bank beats RBA to rate rise

Adelaide Bank is the first major Australian financial institution to confirm that it will raise mortgage interest rates in response to the international volatility caused by the sub-prime crisis.

The bank reportedly plans to lift rates by 0.25% tomorrow on wholesale mortgage products, which it sells via mortgage brokers and managers, which will then have to decide if they will pass the increase on to consumers.

Senior figures in the banking industry such as NAB chief executive John Stewart have foreshadowed that they may have to lift rates because of the increased cost they now face in borrowing on international financial markets, but the Adelaide Bank is the first to act on the concerns.

The move attracted comment from new Prime Minister Kevin Rudd this morning. “I’d be very concerned about the commercial banking sector moving much beyond that.”

The decision means some borrowers are likely to face higher interest rates whether or not the Reserve Bank of Australia decides to lift the official cash rate when it meets tomorrow.

The consensus market view is that the RBA will not decide to lift rates tomorrow because of growing worries about the health of the US economy and its possible effect on Australia.

But most economists remain confident that there will be a rise sometime in the first quarter of next year unless the US seriously deteriorates in the mean time.

And the US Federal Reserve appears to have got US banks on board in working to prevent that happening.

The major US banks are reportedly working on a plan to delay scheduled increases in thousands of sub-prime mortgages in an attempt to stem the country’s haemorrhaging housing market.

Many sub-prime mortgages were sold to home-buyers on the basis of a cheap introductory rate that would step-up by around 3% after a year. Banks now fear that if those rate hikes are implemented thousands of loan-holders could default, further intensifying the US economy’s current downward spiral.