Westpac Defends Excessive Rate Hike

Post by Sharat on December 2, 2009 · Under Australian Economy, Business News, Company News, banking, home loans, interest rates, mortgages · Comment

Australian banking major Westpac, who yesterday raised its variable mortgage rates by 45 basis points, or 20 basis points in excess of the Reserve Bank of Australia’s official interest rate increase, strongly defended its action arguing its net interest margin would continue to erode if it failed to acknowledge commercially reality.

As rival banks undertake interest rate reviews, and experienced market participants expressing surprise at Westpac’s decision, Treasurer Wayne Swan furiously warned that Westpac was likely to be on the receiving end of a customer backlash.

Most analysts believe that rival lenders are unlikely to take Westpac’s lead and follow suits with interest rate rises of their own of the same magnitude for competitive reasons.

Westpac’s Peter Hanlon told The Australian, that the bank’s customers may find the need for such a dramatic increase in variable rates perplexing, given that the lender reported a 30 basis point increase in its 2009 net interest margin.

“But I would stress that the margin looks back, not forwards, and we are feeling the pressure from rising average funding costs. Our average cost of funding has risen quite dramatically, and it would have driven margins back over time, remembering that the increase in the 2009 margin only took us back to where we were two years ago.” Mr. Hanlon said.

Westpac’s decision to raise its interest rates followed soon after the central bank raised the official cash rate by 25 basis points to 3.75 per cent, the third consecutive rate hike in as many months.

The RBA expressed its concerns about an imminent resource boom which could result in Australia seeing uneven fast track growth at the expense of other sectors, whose recovery could be held back.

Financial markets and economists are pricing in a 52 per cent chance of a fourth consecutive interest rate hike when the RBA’s board meets again in February.

Glenn Stevens, the central bank’s governor says that many Australian households were well positioned economically, as housing prices continue to rise and the stock market recovered 40 per cent from its March lows.

“In Australia, the downturn was relatively mild, and measures of confidence and business conditions suggest that the economy is in a gradual recovery. The effects of the early stages of the fiscal stimulus on consumer demand are fading, but public infrastructure spending is starting to provide more impetus to demand. Prospects for ongoing expansion of private demand, including business investment, have been strengthening. There have been some early signs of an improvement in labour market conditions.” Mr. Stevens said.

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