The big banks want to raise mortgage rates – with or without the RBA: Bartholomeusz

The Reserve Bank may have again sat on its hands in relation to official interest rates, but with yesterday’s theatrical events in Canberra out of the way, the four big banks will be looking at each other wondering which one is going to blink first and raise mortgages rates regardless of the RBA’s inaction.

The majors were hoping, without any confidence, that the RBA would raise rates against the backdrop of a right employment market, booming resources sector and inflation that is drifting towards the top end of its target zone. That would have provided them cover for an increase in mortgage rates.

Now if they want to move, they’ll have to do so independently and within a very complicated political context; one where the elements within parliament that are reflexively inimical to big banks will have a far greater sway.

Privately, the banks have been making it clear that they are under increasing pressure. They were, however, never going to move during the election or its awkward aftermath.

The recent Commonwealth Bank results and third-quarter updates from the other majors highlighted the problem they are facing. In the June quarter lending growth for the two big mortgage lenders, CBA and Westpac fell away sharply and net interest margins were compressed – Westpac’s was 24 basis points lower than a year earlier and CBA lost 14 basis points in the second half.

While the impacts on profits of the continuing squeeze on margins as average funding costs continue to rise steadily and volumes fall away has been disguised to some degree by falling impairment charges, there is obviously a limit to the extent to which bad debts can continue to fall. There is some anxiety within the banks that, because they can’t pass on the higher funding costs to home loans, the business they are writing is costing them profits.

The abrupt slowdown in mortgage lending by the two Sydney-based banks is a form of credit rationing – they are now competing more aggressively for corporate and commercial customers where they have greater freedom to price. That explains why the RBA referred to evidence emerging of the banks’ greater willingness to provide credit to business.

With more than half their balance sheets tied up in mortgage lending, however, and their average funding costs rising, at least in CBA’s case, at about two basis points a month, there is a limit to how long they can hold out before risking the backlash and raising rates of their own volition to protect their profitability.

With the RBA providing no hint of an imminent change to official rates, there is no near term cloak for a rise in mortgage rates.

But with the election result now resolved, after a fashion, the pressure to move will intensify. Mind you, none of them will want to move first.

This article first appeared on Business Spectator.