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Funding pressures not to blame for rate hikes, says RBA

Funding pressures not to blame for rate hikes, says RBA

Banks’ ratcheting up of interest rates is not due to funding costs as they claim, the RBA has underscored at its latest monetary policy meeting.

Over the past few months, several banks have upped their interest rates, with increases from major and non-major lenders ranging from seven to 117 basis points. The latest increase came from Westpac, which announced earlier this week that it has raised fixed interest rates on interest-only home loans.

Some lenders have pointed to increased funding costs as a driving factor behind the changes, however, in the minutes of its latest monetary policy meeting, the Reserve Bank underlined:

“The increases had been mainly in response to prudential measures introduced by APRA in 2014 to slow the growth in lending to housing investors and preceded measures announced by APRA in late March to restrain the growth of interest-only lending. Funding costs had not changed significantly.”

The board’s comments come after Reserve Bank economist Belinda Cheung published a research article Developments in banks’ funding costs and lending rates, in which she explained that banks’ overall funding costs have remained relatively stable since last year.

Ms Cheung said that in aggregate, debt funding costs for the major banks are estimated to have fallen by approximately 35 basis points over the course of 2016, which in part reflects a reduction in the cash rate of 25 basis points in May and again in August.

“The spread between the major banks’ funding costs and the cash rate is estimated to have risen by around 13 basis points over the past year, from around 15 basis points to just under 30 basis points,” she said.

“The increase in the spread between banks’ funding costs and the cash rate occurred in mid-2016. Funding costs have been little changed since then.”

According to the minutes of the RBA’s monetary policy meeting, the board also pointed out that overall, the cumulative increase in interest rates across the banks since November is an average of around 25 basis points for loans to investors with P&I repayments, and only a slight increase for loans of this type to owner-occupiers.

“In addition, the four major banks [have all] introduced higher interest rates for interest-only lending, with an average premium relative to principal and interest lending of around 15 basis points,” the meeting’s minutes said.

“As a result, investors with interest-only loans on variable rates [are] facing benchmark interest rates similar to those that applied to the same product about three years earlier.”

Ahead of its next meeting next Tuesday, board members also noted that pricing in financial markets indicated no expectation of a change in the cash rate over the remainder of the year.

[Related: Funding costs ‘little changed’ since mid-2016]

Funding pressures not to blame for rate hikes, says RBA

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