Bank rate hikes ‘reasonable’ despite ‘unusual’ market: ANZ

Senior economist at ANZ David Plank has claimed that interest rate increases of 10 to 15 basis points are not “material”, adding that it would be “reasonable” to expect other major banks to lift interest rates out of cycle, following Westpac’s 14 basis point pricing adjustment to its home loan products.

Adelaide Bank and Suncorp have also announced rate rises of up to 40 basis points, with the lenders also attributing their decision to rising funding costs.

Mr Plank said that he expects the trend to continue, but he does not believe the rate changes would impact households in a “significant way”.

“It is now generally accepted that at least some of this increase will likely be sustained. It seems reasonable to expect that other major banks will follow the Westpac move in time, to a greater or lesser degree,” Mr Plank said.

“In the normal course of affairs, we wouldn’t view an increase of 10–15 bps in the floating mortgage rate as all that material.

“Certainly, it is not something that we would see as impacting the outlook for household consumption in a significant way.”

The economist claimed that with interest rates dropping over the past few years, recent hikes are unlikely to alarm the Reserve Bank of Australia (RBA) into revising its monetary policy outlook.

“Up until this point, the average mortgage rate facing households has been falling. The RBA has made some effort to highlight this in recent communication,” Mr Plank continued.

“If all the major banks follow Westpac’s move with changes of a similar size, then the overall impact will be to reverse the decline seen over the past year.

“It seems unlikely that the RBA will be particularly alarmed by the increase. As always, however, we need to consider the change against the current economic backdrop.”

However, Mr Plank acknowledged that current market conditions are “unusual”, noting that while not unprecedented, the combination of falling house prices and rising interest rates is “unusual”.

“This increase in mortgage rates is happening at a time when house prices are falling. This is an unusual combination, though not unprecedented.

“The only instance of mortgage rates rising while house prices were falling in quarterly terms was in the first half of 2008. A time when the unemployment rate was below 4.5 per cent wage growth was very strong but mortgage rates were above 9 per cent.

“The mortgage rate increases that took place in 2008 when house prices were falling were driven by rising funding costs rather than the RBA.”

Mr Plank concluded: “The combination of falling house prices, political uncertainty and a rise in mortgage rates (if only very modest) may be more negative for households than a small increase in interest rates would be in isolation.”

[Related: RBA outlook ‘too optimistic’, say economists]