Westpac Chief Believes Interest Rates Have Bottomed And Outlook for Australian Economy Improving

Post by Sharat on July 22, 2009 · Under Australian Economy, Business News, Capital Markets, Company News, banking, interest rates · Comment 

Australian Banking Major Westpac Banking Corporation believes that interest rates have bottomed and are likely to begin rising again, according to Westpac chief executive Gail Kelly.

Ms. Kelly who runs Australia’s largest lender by market capitalisation made comments on Tuesday defending the bank’s own interest rate policy, saying that higher funding costs had resulted in higher interest rates as a result of the banking crisis.

“We appear to be getting to the bottom end of the interest rate cycle. If you actually have a look at what’s happening with bill rates you’ll see that they’re on the way up. So the market on the whole is beginning to expect rates to go up.” Ms. Kelly said to journalists after speaking at a business lunch in Sydney.

The banking crisis had caused intense competition for retail deposits which has resulted in higher costs of acquisition of such type of funding. Whilst wholesale fund costs had also risen Ms. Kelly said.

“Our funding costs have materially changed and we think have structurally changed for the medium term. In light of that, for us to retain a double-A [credit rating] and for us to in fact continue to be able to provide funding support to our customers and their borrowing needs, we need to adjust together to this new reality.” Ms Kelly said at the event.

Ms. Kelly also expressed the need for banks to explain their interest rate policies to their customers, and the need for strong domestic financial institutions which are able to maintain high credit ratings despite tough economic conditions.

Australia’s central bank the Reserve Bank of Australia (RBA) earlier this month left official interest rates unchanged at half century lows of three per cent. The RBA did however give itself the option of easing interest rates further if it felt monetary policy needed to be loosened further to support a faltering economy.

Commenting on whether variable loan interest rates could fall further Ms. Kelly said “I think we’re getting near the end, or near the bottom, of the interest rate cycle.”
Westpac’s standard variable home loan rate currently stands at around 5.80 per cent.

Ms. Kelly, who previously ran St. George before it was acquired by Westpac was fairly sanguine about the outlook for the Australian economy. Ms. Kelly told the function she believed the economic slowdown would not be as acute or last as long as had been thought as recently as four months ago.

Ms. Kelly added that Westpac’s commercial and corporate clients continued to remain financially distressed.

“Looking to our business, particularly with our commercial and with our corporate customers, we can see financial distress and operating distress still actually making its way through the businesses of our customers, with all the consequences that that brings. So I think we’re still in for quite a challenging period over the next 18 months.” Ms. Kelly said.

The Westpac chief however warned that there were still foils to the improving business and consumer sentiment and in particular, highlighted unemployment.
Westpac has forecast the unemployment rate, which stands at 5.8 per cent currently, to increase to 7.5 per cent by the end of this year, and to peak at 8 per cent in 2010.

Another obstacle to full economic recovery may arise from regulatory oversight of the financial services sector Ms. Kelly said, calling for better and increased dialogue between the sector and the government.

“There’s a range of things coming our way, some of which is still quite uncertain in their implications, some of which haven’t had a lot of industry consultation, and as occurs in those situations you can sometimes have unintended consequences. We need to work really carefully and thoughtfully with regulators and legislators to make sure that that situation doesn’t arise.” Ms. Kelly told journalists.

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