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Banks may exceed Reserve on rates

BANKS have warned that funding costs are likely to remain high well into next year, raising the prospect that any future interest rate rises may outpace moves by the Reserve Bank.
By · 9 Oct 2009
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9 Oct 2009
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BANKS have warned that funding costs are likely to remain high well into next year, raising the prospect that any future interest rate rises may outpace moves by the Reserve Bank.

The big banks and regional lenders yesterday raised rates across their variable mortgages by 25 basis points, matching the central bank's quarter of a percentage point rate rise this week.

Given significant government support for the sector over the past year in the form of deposit and funding guarantees, banks have been careful to keep politicians on side by limiting rate rises on mortgages.

But rates in less politically sensitive areas such as business loans and credit cards have been rising as banks moved to safeguard profit margins.

But banks argue they still face substantial funding headaches, particularly in overseas markets still affected by the global financial crisis.

A spokeswoman for National Australia Bank said yesterday: "We expect overall costs to increase into 2010, driven mainly by the rising average cost of term wholesale and retail deposit costs."

Banks usually generate half their funding from deposits, the balance split between mostly offshore short-term and long-term funding.

While short-term funding costs have eased from the highs reached in the weeks after Lehman Brothers collapsed 13 months ago, long-term wholesale funding costs remaining high.

Indeed, average costs have increased in the past six months as governments and banks around the world compete in overseas markets for limited long-term funds. At present Australian banks are paying a premium of about 1 percentage point over the benchmark bond rate for term funding. Before the credit crisis banks were paying a premium of just 0.2 per centage point over the benchmark bonds.

The Commonwealth Bank's head of retail banking, Ross McEwan, said: "Wholesale funding costs remain high and continue to increase as previous long-term funding matures and is replaced with new funding at a significantly higher cost.

High wholesale funding costshave also forced banks to rely more on domestic deposits, pushing up the cost of customer deposits for banks by between one and 1.2 percentage points over the past year.

The latest rate rise is likely to spark a further price war on deposits, with some banks including ANZ yesterday lifting rates on high-interest deposit accounts 50 basis points.

In lifting rates from near 50-year lows, the central bank cited a better-than-expected recovery of the economy, a view underscored by yesterday's surprise fall in the jobless rate to 5.7 per cent last month. The bank is eyeing a more "normal" setting for monetary policy, hoping to minimise the risk of inflation.

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