Here's why Westpac's rate decision matters

Westpac has today increased its mortgage rates for both residential owner-occupier and investment lending by 0.2%, or 20 basis points.

Given its market share this means the bank has effectively just hiked home loan rates for 21% of the owner-occupier home loan market — that’s one in five Australian residential mortgage holders.

The surprise monetary policy tightening from Australia’s second largest residential mortgage lender will not help Australia’s efforts to rebalance the economy. In fact, by taking money out of the pockets of Australian households, money that could be spent in other areas of the economy, it could actually hurt Australia’s economic transition which is already struggling with weak business investment, rising unemployment and economic uncertainties emanating from our largest trading partner, China.

Financial markets think that Westpac’s decision increases the likelihood that the RBA will lower interest rates in the months ahead.

A cash rate of 1.5% is now nearly fully priced by mid-2016, 50 basis points lower than where it currently sits today. The Australian dollar has also tumbled in anticipation of further rate cuts ahead, losing 0.5% in the immediate aftermath of the Westpac announcement.

At its October monetary policy meeting Governor Glenn Stevens wrote: “further information on economic and financial conditions to be received over the period ahead will inform the Board’s ongoing assessment of the outlook and hence whether the current stance of policy will most effectively foster sustainable growth and inflation consistent with the target.”

It will be interesting to see what happens in the days ahead, particularly should other lenders follow the lead of Westpac, which would add pressure on the RBA to cut the cash rate further.

We’ll certainly be keeping a close eye on the banks’ for any announcements.

Watch this space.

Now read: Westpac just added pressure on the RBA to cut rates.

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