Hung parliament delays bank rate rises

25/08/2010

One likely result of the weekend’s election dead-heat is to further delay any plans by the major banks for new lending rate rises. The balance of power in both houses of federal parliament now rests with groups that have been keen to attack the banks – rural populist Bob Katter, and the Greens. In this situation, new rate rises could trigger a political attack and draw the ALP and the Coalition into a cycle of new regulatory proposals.

The CBA and Westpac have signalled over recent weeks that they would like to raise rates after the election. Commonwealth Bank chief Ralph Norris said at his third-quarter profit announcement that funding costs were rising at about two basis points a month – and added that “at some point, we may well have to pass on something to our customers”. And Westpac’s Rob Coombe, group executive, retail and business banking, told The Australian last week that “there's definitely pressure on all of us” to raise mortgage rates after the election.

A number of smaller players, including Bendigo and Adelaide Bank and Wide Bay Australia, have signalled they would be likely to follow the major banks in an out-of-cycle rise. The Reserve Bank of Australia has essentially argued that the case for new rate rises is weak. In a note released in early August 2010 as part of its regular Statement on Monetary Policy, the RBA calculated that banks’ interest spreads were now higher than in the months before the start of the global financial crisis.

Source: Banking Day