MNI ANALYSIS: Funding Cost Threat To RBA MonPol Dissipates

By Sophia Rodrigues

     SYDNEY (MNI) - Even as it remained alert to developments in the money

market, the Reserve Bank of Australia's quiet confidence that competition for

home loan business would prevent any significant rise in mortgage rates was

somewhat vindicated recently as one of Australia's big four banks, the

Commonwealth Bank, lowered interest rates on some mortgage products.

     The RBA is also likely to take comfort from the fall in the bank bill swap

rate (BBSW) from its recent peak, and these two developments taken together

significantly reduce the risk of a further easing in the cash rate, at least to

the extent that such a risk was tied to money market developments.

     Earlier this week, CBA lowered interest rates on two year fixed mortgage

rate for owner-occupier loans by 10 basis points to 3.79%. It also cut its fixed

rate for three year owner-occupier mortgages, and for two and three-year

investor home loans.

     --RBA BBSW WATCH

     Last month, MNI reported that the RBA is unable to pinpoint the exact

reason for the increase in the BBSW but is mindful of the implications for

monetary policy if it becomes a persistent issue, given BBSW is a major

credit-based benchmark for the Australian dollar and directly affects banks'

funding costs.

     The RBA's understanding was that several reasons explained the rise but

given there had been no significant local development or a structural change in

the market, it had been hoping that the increase was unlikely to be sustained.

And while there was always a concern that banks would pass on higher funding

costs to mortgage rates if they continued, the RBA was also hopeful that

competition for home loans would prevent any significant increase.

     This is not to say that the RBA has been unalert in monitoring developments

in the money market. Indeed, the RBA was concerned enough to mention them in the

cash rate statement but it was also quietly confident that banks will be wary of

pushing mortgage rates significantly higher.

     Not only has the RBA's confidence proved correct, it might also be

pleasantly surprised to note CBA's move earlier this week to lower, instead of

lifting, mortgages rates on several products.

     --NO ACROSS-THE-BOARD INCREASES

     This means none of the big four banks have so far raised mortgages rate in

response to a rise in funding costs. On the contrary, CBA's move now puts

competitive pressure on the three other 'big four' banks to reduce their own

rates. It is worth noting that some banks are already responding to competitive

pressures by offering bigger introductory discounts on new mortgages.

     Some smaller banks have increased their mortgages rates in recent weeks,

but if the big banks don't follow suit, any further rise or broad-based

increases seem unlikely.

     One of the reasons banks can afford not to pass on higher funding costs to

mortgage rates is because they are already recovering some of the increased

costs from their business customers, as some business lending rates are closely

linked to BBSW rates. 

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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