MNI INSIGHT: RBA Alert To Lending Rate Rise As Funding Cost Up

--RBA Policy To Discuss Rising Money Mkt Rate, Funding Cost Impact

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of Australia is alert to the risk of an

increase in lending rates if banks start passing on increases in funding costs

and, if this comes to pass, it would delay a hike in the central bank's cash

rate.

     This could be a key reason why Governor Philip Lowe didn't sound more

hawkish on interest rates (when he spoke in Sydney Tuesday), despite the RBA

being more optimistic about growth and inflation prospects.

     However, any rise in mortgage rates is unlikely to be big enough to change

the direction of the cash rate and so the next move in the cash rate remains up,

although early next year may be a more appropriate timing.

     The quarterly Statement on Monetary Policy, due Friday, is likely to

contain a detailed discussion on recent developments in the money market and how

this affects banks' funding costs.

     Money market rates have risen in Australia in recent months due to a rise

in the cost of U.S. dollar funding, not for reasons directly related to RBA

monetary policy.

     Initially it was unclear whether this rise was temporary or permanent. But

now the RBA is of the view that at least some of the increase is persistent.

This has a more direct impact on short-term funding costs for domestic banks,

and also on their longer-term funding which is linked to the BBSW (bank bill

swap rate).

     In early 2017, the 3-month BBSW rate traded around 26bps above the RBA cash

rate, but it touched a high of 2.08% recently which is 58bps above the cash

rate, and was last trading around 2.02%.

     So far none of the major banks have pushed their mortgage rates higher,

despite pressure on their funding costs. There is speculation that banks are

resisting such a move because they are under increased public scrutiny due to

the Royal Commission investigating bank conduct.

     But the longer it takes for the higher rates to wind back, the more

impatient banks will get, and they will eventually push up lending rate.

     ANZ's Chief Financial Officer Michelle Jablko may have hinted at this in an

interview published by the bank's digital publication 'bluenotes' following the

release of half-yearly results on Monday. Janlko said there there would be

pressure on margins if funding rates didn't ease.

     "Short term funding costs have really picked up in recent weeks," Jablko

said.

     "All things being equal if I look at it today and say if rates stayed where

they were today and our balance sheet mix stayed, it would have an impact in the

second half."

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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

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