Banks capitalise on rising rates

While the chances of a third straight monthly rise in interest rates hang in the balance, the current climate of rising rates the banks seems to be giving banks the opportunity to increase margins in key areas of consumer lending. On credit card rates, the four major banks have passed on in full the two official rate rises so far this year totalling 0.5 percentage points (with rates now as high as 18 percent). Last year, when official rates fell 2 percentage points, the banks passed on between 0.75 and 1.5 percentage points in rate cuts to card holders, increasing their margin on these products. While that could have been passed off as a temporary expansion, it now it appears that they will lock in this extra margin as rates rise this year. Meanwhile most fixed rates have continued to rise despite a recent fall in yields on the bond market, the source of the banks’ fixed-loan finance. The result is that many lenders have increased their margins on fixed rate home loans too, by up to half a percentage point. Bond yields have slipped around 0.3 percentage points over the last month and while some lenders at the upper end of the market have adjusted fixed lending rates downward most have either let them the same or raised them. The Commonwealth has in fact raised its 3-year fixed rate by 0.3 percent. Last year saw non-bank home lenders become competitive on fixed rates, driving margins down. This situation now appears to be unwinding as rates rise. There are mixed signals this week on the chances of a third consecutive monthly interest rate rise in early July. The Westpac-Melbourne Institute index of consumer sentiment has risen 2.5 per cent this month despite the first two rises in official rates and the prospect of more to come. But while the consumer sector remains buoyant, the outlook as business sees it is not quite so rosy. The latest Dun & Bradstreet survey shows that business confidence has dropped for the third month in a row, and this may introduce some doubt in the minds of RBA board members about the ongoing strength of economic growth this year, especially as it relies somewhat on continuing increases in business investment.