Aussie wholesale funding costs keep on rising, pushing mortgage rates up despite no change in the RBA policy rate. Politicians there won't be impressed

Aussie home loan borrowers face mortgage rate rises even if the RBA doesn't hike.

By George Lekakis*

The Reserve Bank [of Australia]'s high hopes of containing mortgage interest rates until sometime next year look to be crumbling from the sustained advance of wholesale funding costs.

Bank of Queensland and AMP Bank are the latest lenders to reprice home loans in response to movements in wholesale benchmarks, following similar moves last week by IMB Bank and Auswide.

BoQ has boosted rates on its range of owner-occupied and investment loans by up to 15 basis points after citing rises in wholesale funding costs as the main reason.

“Funding costs have significantly risen since February this year and have primarily been driven by an increase in 30 and 90 day BBSW rates, along with elevated competition for term deposits,” said Anthony Rose, BoQ’s acting head of retail banking.

“While the bank has absorbed these costs for some time, the changes announced will help to offset the ongoing impact of the increased funding costs.”

BoQ’s exposure to movements in wholesale funding has increased this year because it has lost ground in the deposits market.

According to data published by APRA, BoQ’s overall deposit base declined by almost A$500 million in the five months to the end of May.

AMP Bank, a lender highly exposed to movements in wholesale benchmarks, has also raised rates by 40 basis points on interest-only loans for owner-occupiers and investors.

More lenders, particularly those without growing deposit bases, are expected to reprice in the next few weeks, according to mortgage experts.

“I think the rate rises are inevitable among non-deposit taking lenders,” said Steve Mickenbecker, the head of ratings at Canstar.

“It’s going to put pressure on the Reserve Bank because it’s going to find the market repricing well ahead of movements in the cash rate.”

Mickenbecker believes the four major banks will eventually reprice also, but their reduced reliance on wholesale funding give them some capacity to delay out-of-cycle rises.

The RBA has come under heavy criticism this year from banks and other lenders for allowing the spread between the official cash rate and market rates to widen.

While leading economists such as Westpac’s Bill Evans are not expecting an official rate rise before the second half of next year, lenders are questioning the wisdom of keeping the cash rate on hold while real cost of money rises.

Bendigo Bank chairman Robert Johanson believes the central bank has waited too long.

“They’ve been trying to do too much work with monetary policy,” he told Banking Day.

“I’m concerned that apart from the impact we’ve already seen on asset values, mortgage rates are going to break from the official cycle and will do so in a disruptive way.”

The funding pressures on lenders are emerging at an awkward time for the Turnbull Government, which is required to call a federal election within the next 12 months.

A series of out-of-cycle increases across the industry could induce a blistering political response from government politicians who are cognizant of the historical links between election outcomes and mortgage rate rises.

This story is a repost from It is here with permission.

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There is a reason that the market is demanding higher rates on mortgage debt, and it should be listened to.

People need to understand that they don't have some sort of god-given right to the lowest possible interest rates.

Yeah, low US interest rates have for some time lifted their boat and now it’s going to drag them down. I think this is going to be a big teachable moment for the aussies. The US has been and gone through their bubble bust many years ago, and now it’s the aussies turn. I think they are in for a big shock. The cash rate is only 1.5% anyway, cuts to that will be like pushing in a piece of string.

Plus the RBA see 1% as a practical floor, so that leaves only 2 cuts.

Which of the main lenders will be first to follow suit, my guess would be Westpac. I wonder when the scramble for deposit funding will begin?

It would make sense to raise the interest on deposits to attract more local funding. The problem is if people start saving and stop spending(or borrowing to spend) then the wheels fall off the economy.

Next RBA move will be a cut - as called many months ago!

Maybe, but at 1.5% cash useful will cuts be? If Aussie house prices are falling, cuts may help serviceability at the margins, but where are the buyers going to come from in a market where the expectations are for further price falls? I can’t see cash rate cuts as being terribly useful, given where the aussies are right now

I agree, and I don't think the buyers will come. House prices are toast. But I think the RBA might kick the can one last time as they did 2016 (if only to hold retail interest rates flat for a little while longer).

Yeah, I agree they’ll cut, but I don’t think it will have much effect...

Same logic for our OCR at 1.75%

Watch the dollar, its trying to break down. Once that drop comes along the aussie banksters will need to up the rates to get same pound of flesh.

They'll cut again if only to slow down the rate of distressed sellers hitting the market. There will be many for whom a 0.25% off the rate will extend the agony another year or so until inflation knackers them from the other end through increased import prices and a devalued dollar.
Bobster - Where to you see the Aussie Dollar and Kiwi against the pound/euro/US dollar 12 months from now?

God, I don’t know, I stay away from guesses in currencies. I suppose if the OCR falls below international rates our currency will come under pressure, maybe that won’t bother us but a fall in our dollar will hammer the consumer sector

I find it funny how none of the property spruikers see the relevance of this.. In fact they probably haven't even bothered to read this article because there is no mention of houses, auctions or sales in the title. Ignorance must be bliss!

Yeah, to me what’s happening in Aussie is the really big story. People say the Aussie banks has fleeced us, hell I think it’s the other way round, we have loaded up on cheap credit supplied by the credit strength of the Aussie banks. Well, that’s over for the good do the NZ subs of the Aussie banks look when the tides goes out in Australia? What’s the credit of the NZ subs, I mean, Auckland has barely the population of Adelaide? If the Aussie banks suffer a funding disruption, the NZ subs are on their own

Those are the multi-billion dollar questions.

At a minimum I think we're looking at a credit rating downgrade for Australia and the Big4, which would presumably mean a downgrade for the NZ subs and therefore higher borrowing costs.

But I wonder if the biggest impact will eventually be a tightening of NZ lending standards like we are seeing in Australia right now - essentially a 20-30% reduction in loan size due to proper checking of living expenses, income, existing debts, etc. Or limits on interest only. Or APRA limiting DTI as it's currently focusing on (giving the RBNZ a stronger mandate).

It was only 12 or so months ago the Big4 were telling the world how good their lending standards were...."nothing to see here"....but the Royal Commission has blown that to pieces...

I am struggling to understand how we could have got to household debt of 170% and prices of 9x income without lots of junk lending, just like Aussie. Given what is happening to the Aussie banks I just can’t see how the NZ subs can carry on like before. I am sure credit will tighten considerably here.

For NZ its nearly a $700,000,000,000 question and I can't see how this pans out without a fair amount of pain in Australia first. Unless of course the banks hide the bad debts in the balance sheet and we don't see the defaults in the market place competing with the rest of the stock. I remember the catastrophe of the UK banks lending 5 and 6 times multiples pre crunch which looks incredibly prudent in comparison to the last 10 years in Aussie and NZ.

Martin North from Digital Finance Analytics in Australia has similar concerns! - Click on the link and check out his blog