Predictions banks will up rates further

ALL eyes are on Australia's banks, with predictions they will lift home loan rates by more than yesterday's official increase. The big banks are...

Predictions banks will up rates further

ALL eyes are on Australia's banks, with predictions they will lift home loan rates by more than yesterday's official increase.

The big banks are again considered likely to lift variable home-loan rates by more than yesterday's 25 basis point increase in official interest rates.

Ahead of yesterday's hike in the Reserve Bank's (RBA) cash rate to 7.25 per cent, Prime Minister Kevin Rudd warned banks not to lift variable home-lending rates - now around 8.95 per cent - by more than the anticipated 25 basis points.

Sharing the profits

Asked what he would do if that occurred, Mr Rudd said the Government was discussing what other measures were possible with the Australian Competition and Consumer Commission.

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"Banks experiencing record profitability should be very, very mindful of their corporate and community standing before leaning on people who borrow from those banks any further," he said.

So far this year, the big banks have added a further 15 to 20 basis points to RBA increases to rebuild their margins.  Fixed home-loan rates have also been rising.

However, as the Big Four put their rates under review yesterday, a senior banker said the industry was between a rock and a hard place, absorbing an annualised $1.4 billion earnings hit from higher funding costs while facing a political backlash if some of that cost was passed on to borrowers.

The banker said Prime Minister Kevin Rudd's threat to unleash the competition watchdog to examine anti-competitive conduct had complicated the response to the 12th consecutive rate rise since 2002.

"If you push a new government too hard, you could end up in the same basket as the petrol companies, with the ACCC looking at every pricing move," the banker said. 

Mortgage rates near 10 per cent

Rates ABN AMRO analyst Jarrod Martin predicted that the banks, "if they were true to their word, would pass on the 25-basis-point RBA increase, as well as an extra 10 to 15 basis points", which would push standard variable home loan rates close to 10 per cent.

"The funding market has deteriorated since they last went outside RBA increases, but they could play a bit of a waiting game to see where the market settles," he said.

None of the banks would publicly canvass the likelihood of adding a margin to the RBA adjustment.

An ANZ spokesman said a decision was likely later in the week. "It's inevitable there'll be some flow-on to mortgage and other lending rates, and we have the added consideration of the ongoing pressures in wholesale markets which have raised funding costs further," he said.

Westpac and Commonwealth Bank rates are under review.

NAB CEO John Stewart said last week that further unilateral rate rises could not be ruled out.