Australia’s largest bank, the Commonwealth Bank of Australia, has raised interest rates on owner-occupier mortgages by 15 basis points.
This follows Westpac, the nation’s second biggest bank and the institution with the greatest exposure to residential mortgage debt, which raised rates by 20 basis points last week.
Effectively, half of all Australian households have just been delivered an interest rate hike.
It remains to be seen if ANZ and NAB, the other two of the “big four”, will lift rates too.
Independent rate rises by the major banks opens all sorts of questions for the Australian economy, as increases in mortgage repayments can dampen domestic demand while the economy is trying to rebalance following a once-in-a-generation mining boom.
Critical domestic demand
The availability of cash in people’s pockets is crucial in this equation to stimulate demand for domestic goods and services: think cafes, restaurants, training courses, holidays, and road trips. A 15 basis point increase on a $900,000 mortgage – the median price of a house in Sydney – is $85 monthly, which might not seem much until you consider it adds up to more than $1000 a year.
All of the major banks are under pressure from both the banking regulator in Australia, known as APRA, and forthcoming capital risk management rules under the so-called Basel accords, to increase the amount of capital they hold against their debts.
The four biggest Australian banks have already gone to the market this year for major capital raisings, hauling in around $18 billion in issues between them. The Commonwealth Bank alone raised $5.1 billion and NAB raised $5.5 billion.
Before the usual southern spring property market rush, three of the banks announced significant increases on the cost of mortgages for housing investors. Investment giant AMP Capital also declared a moratorium on investment lending and a 100 basis point increase on the cost of housing lending.
These were all signals that the major banks have been pressured by regulators to shore up their mortgage books.
This week, amidst the first significant economic announcement from the federal government under the new leadership of Malcolm Turnbull, was a commitment to force the major banks to accumulate capital in order to become “unquestionably strong”, a phrase that has effectively meant an increase in capital against loans from around 8.5% to over 11%.
Many analysts noted last week that Westpac’s move on its own would increase pressure on the Reserve Bank of Australia to drop interest rates from its historical lows of 2% on the current cash rate.
Market analysts from global investment banks including Morgan Stanley, UBS, Goldman Sachs, and Credit Suisse have been predicting further cuts to official interest rates from the RBA.
However, there have been signs that the domestic economy has been picking up significant pace in recent months, with business conditions hitting six-year highs last months. The minutes from the RBA’s monthly meeting this week showed the board was not from contemplating rate cuts in the immediate future.
But there’s a saying about the RBA: “It never moves, until it does”, a reflection of how it can surprise investors by slashing rates when the market is not expecting cuts, thereby providing the maximum amount of stimulus into the economy via changes to the cash rate.
While an official rate cut targeted at balancing out the effects of the mortgage increases would still be a surprise to markets, what we know now is that the November RBA board meeting on November 3rd – Melbourne Cup day – is a “live” event.