RBA likely to cut after Westpac’s hike

THE chances of a rate cut by the Reserve Bank will increase if the major banks follow Westpac’s lead and lift home loan rates.

Newcastle Jets'€™ David Carey reacts after receiving a yellow card during the round 1 A-League match between Wellington Phoenix and Newcastle Jets at Westpac Stadium, Wellington, New Zealand, Sunday, Oct. 11, 2015. (AAP Image/ SNPA, Ross Setford) NO ARCHIVING, EDITORIAL USE ONLY

THE chances of a rate cut by the Reserve Bank will increase if the major banks follow Westpac’s lead and lift home loan rates, economists say.

Westpac is raising its variable mortgage rates by 0.20 percentage points from November 20 as it passes on some of the cost of new capital requirements, sparking speculation its three major rivals will follow suit.

Asked at a business lunch whether NAB would follow, chief executive Andrew Thorburn says the banking giant’s mortgage rates are under review

“I think we are very comfortable with the position we’ve got but obviously, as with all products and services, it’s something that you react to the market and review on an ongoing basis,” he said.

Meanwhile, the Commonwealth Bank says it is yet to decide “We’ve made no decision on our rates, which remain on hold,” a statement from the Commonwealth Bank said.

AMP Capital Investors chief economist Shane Oliver says Westpac’s hike makes another RBA rate cut more certain, and is tipping a reduction of 0.25 per cent to a new record low in November.

“The last thing the Australian economy needs right now is for homeowners with a mortgage to see a decline in their discretionary spending power,” he said.

If the other big lenders follow Westpac’s lead it, a cash rate cut becomes even more likely, Dr Oliver said.

“The major banks account for about 80 per cent of mortgages, so 80 per cent of those with a mortgage would have seen their rate go up,” he said.

CMC chief market analyst Ric Spooner said consumer and property investor confidence would probably take a hit if the major banks hike rates, which may push the RBA to cut rates.

However JP Morgan chief economist Stephen Walters said Westpac’s move is not a game changer for the central bank.

“It’s another moving part that tightens up financial conditions a little, but our base case is still that rates will be on hold until 2017,” he said.

“The RBA’s been pushing for slower growth in credit and for the banks to have to keep more capital.” Commonwealth Bank is also sticking with its forecast of no change by the RBA until the end of 2016.

The RBA did not react when major lenders increased interest rates to investors and wound back discounts on home loans earlier in 2015, CBA chief economist Michael Blythe said.

“So it’s not entirely clear that they’ll be rushing in to offset the impact of what Westpac have just done,” he said.

The RBA still wants extra stimulus, and will consider the total policy backdrop, not just interest rates, Mr Blythe said.

“Currency and fiscal policy also matter, and when you add those into the mix, the impact of that Westpac move looks less dramatic,” he said.

Prior to Westpac’s rate hike, ANZ was forecasting a cash rate cut in February 2016 and again in May, while Westpac itself has forecast no change in 2016.

Originally published as RBA likely to cut after Westpac’s hike