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Banks in precarious position on rates

After two decades of funding ever-increasing home loans, Australia's banks have reached crunch time.

With the Reserve Bank leaving official rates on hold yesterday - amid demand for loans waning and overseas funding cost rising - the banks may be forced to lift rates independently to claw back profits.

The choice is a tough one: lift their interest rates and they'll hurt the economy, leaving consumers even more reluctant to take out loans.

Keep mortgage rates where they are, amid the rising cost pressures, and their own pockets will take the hit.

The banks were already warning in the weeks before yesterday's Reserve Bank announcement - the cash rate was left at 4.25 per cent - that they may begin setting their interest rates independently.

Bankers have argued that a healthy banking sector has helped steer Australia clear of the bailouts and recessions seen in the US, UK and Europe since 2008 when the financial crisis first emerged. Australia's big four banks recorded profits of $24.3 billion last year.


However, Bell Potter Securities analyst TS  Lim said that at this point the banks would not risk lifting rates independently  of the RBA because it would put more strain on borrowers, and an already patchy domestic economy.

“Every time you raise rates at a time when unemployment could tick up, especially on the white collar side of things, you're going to put unnecessary stress on the mortgage book,” Mr Lim said.

He described the balance between banks' margins and households' ability to pay as “precarious.”

RBS Equities banking analyst John Buonaccorsi said any bank deciding to lift interest rates now would be entering uncharted territory.

 “There seems to be a view they need to claw back some points,” he said. “The easiest way to do that is to when the RBA cuts just claw back less.” Without the opportunity provided by an RBA rate change, he said banks were unlikely to lift rates on their own .

The decision by ANZ and Bendigo Bank to announce rate changes outside the RBA's monthly meeting has also contributed to household uncertainty over mortgage rates.

ANZ Bank refused to offer guidance on its February mortgage rate decision after the Reserve Bank surprised the market by keeping the cash rate on hold yesterday.

“We said we would review our interest rates on the second Friday of every month,” an ANZ spokesman said. “Until that time, we don't speculate on the future movements of our interest rates.”

The ANZ is set to make its statement early-to-mid Friday afternoon.

Bendigo and Adelaide Bank said the process of banks following the RBA's decisions with their own announcement “doesn't work.”

“The reality is that a bank's cost of funding has a tenuous relationship to the cash rate and it's an accident of history that a relationship exists at all,” said the bank's managing director Mike Hirst.

“Our bank hasn't worked through the mechanics yet, but we are looking to provide our customers with a greater understanding of how the price of their loans and deposits are set.”

The impasse over mortgage rates comes as the outlook for the jobs market grows less certain. Even with the jobless rate at a low 5.2 per cent, a slew of layoffs have been announced at Westpac, Holden and Toyota, as demand for loans and vehicles falters.


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