So, ANZ has gone and done it, raising its standard variable home loan rate independently of the Reserve Bank. It is a significant development in banking, albeit a very small and tentative one.
ANZ had been expected, after the second rate review under its new policy of considering rate movements on the second Friday of every month, to either do nothing or add 10 to 15 basis points to its key home loan rate. Instead it added a modest six basis points to, deliberately one assumes, line its rate up with Westpac, which has had the most expensive standard variable home loan rate of the majors.
That may help defuse or at least reduce the intensity of criticism that would have been harsher if ANZ had set a new benchmark.
The bank could be accused of wimping it, given how noisy it has been about the funding pressures that have been intensifying for the major banks. Tactically, however, it was in an awkward position.
This month was one of the handful where the RBA board meeting falls in the second week of the month – in the same week as the ANZ review. Most of the time ANZ would have 10 days to consider the RBA’s decision and probably at least a week to see how its main competitors had responded before it made its own decision.
Instead, to the delight of the other majors, with the RBA sitting on its hands, ANZ not only had to make an independent decision but one that could leave it alone and exposed for nearly a month, drawing the ire of the federal treasurer and other bank critics in the meantime. It has tried to make itself as small a target as possible.
It shouldn’t have had to. This morning, well before ANZ took its baby step into its brave new world of independent rate-setting, the RBA released its latest statement on monetary policy. In it it makes an unequivocal case for bank rate rises.
It says the spreads on bank debt are now "significantly higher than they were in the middle of last year" and that there has been a "step-up in the banks’ overall cost of funding relative to the cash rate."
In its more detailed commentary it noted increases in the spreads on term deposits, on wholesale funding and in the cost of the foreign exchange hedging the banks undertake when they borrow offshore – all the banks’ sources of funding have become more expensive relative to its own cash rate. ANZ should have cut and pasted those comments into its own announcement, just in case Wayne Swan et al missed them.
The reality is that the spreads on their borrowings, whether term deposits or wholesale funds, have been blowing out and exerting pressure on their margins.
The National Australia Bank quarterly update this week showed it had lost about nine basis points of margin relative to the second half of last year. As noted previously, the majors are almost certainly writing new home loans at an initial loss relative to their incremental cost of funds.
ANZ and NAB are the two majors that have been growing their home loans books at rates above the overall system growth, with ANZ growing its share at a greater rate than NAB. That would be intensifying the funding pressure.
ANZ could therefore have easily made the case for a rate increase of at least 10 basis points or more, although its new policy does give it the flexibility to move the rate, in either direction, regularly at its own discretion and therefore it has the ability to lift it with a series of movements, each small enough not to ignite real fury among its customers and the politicians.
Today’s move was a small one for the customers concerned but a major leap for the bank and potential for the system as the banks try to signal and explain to customers that the RBA’s cash rate influences only a part of its funding rather than determining its actual cost relative to benchmark rates.