Rates certain to rise, warns Westpac chief Gail Kelly

MORTGAGE rates "are going to go up" as tailwinds from the global financial crisis lash the domestic banking sector.

Gail Kelly believes there should be out-of-cycle rises in interest rates

WESTPAC chief Gail Kelly has issued a stark warning that mortgage rates will rise as tailwinds from the global financial crisis lash the domestic banking sector.

The era of cheap credit is over and interest rates "are going to go up" to counteract high funding costs induced by the crisis, Mrs Kelly said yesterday defying the government's call for no out-ofcycle rises.

In the most aggressive commentary on the theme by a banking boss since the Reserve Bank kept the official cash rate on hold this month, Mrs Kelly said the days of "excess supply of money have gone".

"Funding costs have gone up very materially as a direct consequence of the global financial crisis," she said.

Her comments coincided with the release of data showing that loans from all lenders for the construction of housing fell for the tenth straight month in August - the longest losing streak since records started in 1975.

The statistics, coupled with Mrs Kelly's warnings that rates will rise, come as another blow to the first-home hunters all but priced out of the property market.

ABS data published yesterday shows that the slice of the mortgage lending pie given to first-home buyers was smaller in August than at any point since mid-2004.

First-home buyers accounted for just 15.5 per cent of housing finance commitments - home loan offers that have been, or are expected to be, taken up.

JP Morgan economist Helen Kevans said "fading interest" among first-home buyers was the biggest drag on demand for home loans and the group was largely priced out of the market.

CommSec economist Savanth Sebastian noted that first-home buyers accounted for 28.5 per cent of all home loans - a record high - as recently as May last year.

Mrs Kelly said Westpac needed to retain its AA credit rating and higher rates were a "trade off".

Interest rates would go up "over time", Mrs Kelly said.

"We can look into our costs of funding and we can look into our profile of the costs over the next 18 months and we can see that . . . those costs of money for the next 18 months are going up."

Her comments come days after ANZ chief executive Mike Smith warned that "something has to give" as banks refrain from lifting mortgage rates while funding costs put profit margins under pressure.