ANZ has the rates running, like it or not
The real decision on the direction of short-term interest rates will be made today. Not by the board of the Reserve Bank of Australia nor its governor, Glenn Stevens, but by the new defacto setters of monetary policy, the ANZ board and its boss, Mike Smith.
Since the global financial crisis Australia's major banks have been frustrated by the perception that the interest rates they charge are set on the back of the cash rate determined by the Reserve Bank.
But for the most part Australia's mortgage holders were not listening.
ANZ broke from the pack in December. It heralded a new interest rate order. It decided to announce its variable rate on the second Friday of each month - detached from regular RBA pronouncements on rates on the first Tuesday of each month.
ANZ's idea was that it would assert its independence from Reserve Bank decisions. But instead it has replaced the RBA as the first mover on rates. The other banks are now using ANZ has a beachhead on determining their variable rate.
From a tactical perspective this doesn't work well for the ANZ.
All the banks need to take into account their own cost of borrowing when deciding what to charge to lend to their customers. But they also need to see what their competitors are doing.
Being first mover is a disadvantage in this respect.
Thanks to the ANZ's strategy, it has now become the leader. The Commonwealth Bank and Westpac will price loans off ANZ's decision and the National Australia Bank will always be tail-end Charlie because it has given a public undertaking to offer the lowest rate in the market.
In February the Reserve Bank decided to keep the cash rate steady and there was not a whisper in response from the banks. The following Friday ANZ increased its rate by only 6 basis points - striking the first blow.
That afternoon Westpac moved its rate up by 10 basis points and on the Monday the Commonwealth also raised its variable rate by the same figure.
NAB jumped on the bandwagon and lifted variable rates by 9 basis points.
It's a new dance - one in which the Reserve Bank has become more of an interested bystander.
In a perfect world all the banks would have boosted their variable interest rates more last month and would desperately like to raise rates again this month. The loans they are writing even now are only marginally profitable.
Being the cheapest allows NAB some marketing advantage but it puts enormous pressure on its margins.
ANZ is left in the unenviable position of offering cheaper rates than Westpac and the Commonwealth and (assuming the costs of funds for all three are roughly similar) the ANZ will be making a relatively slimmer margin. That's great for ANZ customers but not its shareholders.
This leaves ANZ with a dilemma. Does it increase rates a little more today to catch up with Westpac or at least the Commonwealth.
If it makes that decision, will this simply enable the two larger NSW-based banks to lift rates higher again?
In this new tactical game ANZ gained leadership but lost control. The only institution with less skin in the game is the Reserve Bank. Its decisions are noted by the banks but do not greatly influence them. The public still see the Reserve's cash rate decisions as important but over time will come to realise that the lenders are marching to a different beat.
The cost of bank funding has undeniably risen - although not over the past month.
If any of the banks move rates up over the next week it would be an aggressive act to improve margins rather than a defensive one to maintain them.
The European debt crisis has increased the cost of banks borrowing from offshore wholesale markets enormously.
The competition for deposits has not abated so this is also a particularly expensive source of bank funding.
The offsetting factor for Australian banks is that there is little demand from us to borrow. And given the loans banks are writing today are not especially profitable, there is not much of a competitive appetite to increase market share in lending. The only two banks currently increasing their market share are the NAB and ANZ - and in the eyes of banking experts this is seen as a potential negative.
In this new era of low loan growth every basis point advantage between the banks is important.
But raising rates again this month (when the Reserve has not done so) would be a public relations headache.
But be assured that if the ANZ moves today the rest will follow. In this respect they have been singing from the same song sheet.
According to ANZ's Australian chief executive, Phil Chronican, in February ''we faced a serious dilemma in our review, balancing the rising cost of bank funding including deposit customers' interests in receiving highly competitive rates and the expectation of borrowers that we keep lending rates as low as possible''.
On announcing its rate increase in February, Westpac said: ''Increasing interest rates is never an easy decision. However our move reflects the increase in costs of banks raising money … higher deposit rates and higher wholesale funding costs since then [December] make today's move necessary.''
The CBA said: ''The change in home loan interest rates reflects a sustained increase in both wholesale and deposit funding costs.''