How you pushed up home loan rates

Australians are saving more – and that is pushing up both bank costs – and home loan rates.

Sounds strange, doesn’t it?

But Australians are not just saving more.

They are becoming smarter with their money.

They are placing more of it in term deposits, which pay relatively high interest rates.

That,  of course,  adds to bank costs.

These developments were behind the decision of Australia’s big four banks made  last month to raise the rates they charge on home loans, even though the Reserve Bank had left its marker rate on hold in February.

Critics have suggested the banks could have got the money they need, to lend to home owners, more cheaply.

They said this money was available, at low rates, on international markets.

But that’s not what happened.

Indeed figures the Australian Bureau of Statistics published today show that  deposits account for 54.3 per cent of bank liabilities, in the December quarter.

The Bureau said that was the, highest level since June 1996 .

See  Australian National Accounts: Financial Accounts (cat. no. 5232.0)

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Australia’s banks warned on profits:RBA

Australia’s big banks should not chase profits by taking on more risk.

That blunt warning has come from the Reserve Bank, which says bank profits in Australia are already “robust.”

However, in its regular stability review, the Reserve also warns of possible problems ahead.

“The large banks have continued to record robust profits, generating returns on equity that have been broadly in line with long-run averages,” it said.

“ However, the slow credit growth environment could constrain the pace of their future profit growth,” the Reserve added.

“ It would therefore be unhelpful if banks were to chase unrealistic profit expectations by taking on more risk,” it warned.

It spoke of three ways in which that might happen.

These were:-

*…lowering credit standards

*…expanding too quickly into new or unfamiliar markets and

*   by pursuing cost cutting in a way that weakens their risk management capabilities.

The Reserve said, though, that Australia’s banking system remains in “a relatively strong position.”

“The larger banks are in a better position than a few years ago to cope with the tighter funding conditions given the improvements they have made to their funding, liquidity and capital positions over recent years,” it said.

“ Their wholesale funding task is also more manageable, with deposit growth continuing to outpace growth in credit by a wide margin.

“The improved conditions in global bank funding markets this year have enabled the larger banks to significantly step up their bond issuance, including through their newly established covered bond programs.

“ Bond spreads remain wider than in the middle of last year, though, which has resulted in some loan repricing recently.”

More at www.rba.gov.au

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The cash rate still matters:RBA

The Reserve Bank’s decisions on interest rates still matter.

Many people started to doubt that, last month,  when Australia’s big four banks increased  the rates they charge on their home loans, even though the Reserve Bank had left its marker rate on hold then.

Despite that,  a senior Reserve Bank official declared today that its marker rate, known technically as the cash rate, is still a major factor in setting bank rates.

More than that, in fact.

Specifically, Guy Debelle, Assistant Governor (Financial Markets) of the Reserve Bank said: “movement in the level of the cash rate is still the primary determinant of the banks’ funding costs.”

Mr Debelle said that was because other interest rates, including those the banks, themselves, pay on term deposits, tend to move with the cash rate.

Mr Debelle added, though, that there are other factors, as well, such as risk weighting, that the commercial banks must  take  into account.

He acknowledged, too, that, ultimately, the banks would continue to make their own decisions about the rates they  charge on home – and other – loans.

Mr Debelle noted, though, that the link between the Reserve Bank’s marker interest rates – and Australia’s mortgage rates – are much closer than those between comparable rates in other countries, including the United States.

Speaking at a Morgan Stanley Macro Investors’ conference in Sydney, Mr Debelle said Australia’s banks now compete strongly for cash deposits.

So they now pay higher rates, themselves, on those deposits.

There had also been a marked move towards deposits, as a source of the funds the banks lend to their home loan customers.

Australia’s builders – and retailers – have been pressing the Reserve Bank to order another cut in interest rates, to help revive their depressed trade.

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Patchy times ahead, but no early rate cut

There are still patchy times ahead, but an early rate cut is unlikely.

That’s Westpac’s assessment.

It’s based largely on a leading index that the bank produces, jointly, with the Melbourne Institute.

Westpac Senior Economist, Matthew Hassan, says the index “continues to show lacklustre, sub-trend growth.”

The index points to the likely pace of economic activity three to nine months ahead.

It registered just 2.6 per cent in January.

That is below its long term trend of 3 per cent.

Mr Hassan warned, though, that “Westpac doubts” that the “sub trend growth” now in prospect would be severe enough to persuade the Reserve Bank to ease rates next month.

“We suspect that the (RBA’s) board will require more evidence of sub trend growth and a weakening labour market before it is comfortable delivering another rate cut,” he added

That could happen in May or June.

Although still subdued, the latest reading on the index is still an improvement from the low point of 0.7 per cent, which it hit last November.

“The situation has improved from that low point but the Leading Index continues to point to sluggish growth at best in the early part of 2012,” Mr Hassan said.

There is no great surprise, though, in the weak spots identified in components of the index.

The amount of overtime worked, for example, has fallen.

Manufacturing prices, dwelling approvals and company profits are all down, too.

Mr Hassan noted, though, that the contribution from money supply had improved.

The share market hasn’t been a particularly pretty picture, though.

The sharemarket has been a consistent drag on growth momentum throughout the period,” Mr Hassan said.

“But the drag has eased somewhat since August, effectively adding +0.2percentage points to the Leading Index growth rate,” he added.

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We’d have room to cut rates if…RBA

The Reserve Bank believes it would have scope to cut Australia’s interest rates, if the situation in Europe were to suddenly get worse.

The bank admitted, in a publication today, that this is still  “the clearest threat” Australia now faces.

However the bank also warned that it would only be able to act in that way if domestic inflation is contained.

The bank aims to keep Australia’s inflation rate between 2 and 3 per cent, over the course of a business cycle.

The nation’s headline inflation rate, measured on the raw consumer price index, is now 3.1 per cent.

But it is the underlying rate which the bank watches, when it assesses interest rates.

This excludes one off factors, such as the impact of floods on food prices.

On this measure, inflation is still close to the mid point in its target range.

The bank noted, in the minutes of its last meeting, which have just been released, that the “downside risk” from Europe seems to eased recently.

Its comments, though, were unusually bold.

“So long as inflation remained well contained, there would be ample scope for the Bank to ease policy in such a scenario,” its board members said.

“ Overall, members noted that while this downside risk could still materialise, this seemed somewhat less likely than a few months ago,” they added.

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RBA chief warns on rate cut hopes

The Reserve Bank Governor, Glenn Stevens, warned today that rate cuts – alone – will not boost the Australian economy.

Mr Stevens was careful – also – to avoid giving any indication of whether further rate cuts are in store.

Some economists believe that the two cuts the bank ordered, late last year, will not be the last.

They have predicted further cuts, starting perhaps as early as May.

Addressing Asian investors in Hong Kong, though, Mr Stevens was very guarded, in what he said.

“Monetary policy can play a role in supporting demand, to the extent that inflation performance provides scope to do so,” he declared.

“ But monetary policy cannot raise the economy’s trend rate of growth.

“ That lies in the realm of productivity-increasing behaviour at the enterprise, governmental and inter-governmental levels.

“Improving productivity growth is just about the sole source of improving living standards, once the terms of trade gain has been absorbed.

“This is increasingly being recognised in public discussion, but it is important we do more than just debate it.

“Nor can monetary policy obviate the pressure for the production side of the economy to change in response to altered relative prices,” Mr Stevens added.

“ These changes in relative prices are essentially given to us by the world economy.

“They are not driven by any policy in Australia.

“So in Australia, reorienting our economy, adapting to structural changes and improving productivity performance are challenges we face.

“ But we are hardly alone in facing adjustment challenges.

“More generally, reorienting economies in the Asian region, and around the world, remains a major challenge,” Mr Stevens said.

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Confidence collapses

Consumer confidence in Australia has fallen sharply.

The Westpac–Melbourne Institute Index of Consumer Sentiment dropped by 5 per cent this month, to a level last seen before  the Reserve Bank’s two rate cuts last year.

Pessimists now outnumber optimists.

“Sensitivity to interest rates has clearly been one factor responsible for this weak result,” Westpac’s Chief Economist, Bill Evans said.

Mr Evans admitted that the big four banks’ decision, last month, to raise interest rates by an average of 0.1 per cent had clearly had an impact.

So had rising petrol prices

“However, our supplementary questions indicate that respondents are particularly concerned about economic conditions and employment,” Mr Evans said.

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Housing sector still in decline

Australia’s housing industry is still in decline.

The Bureau of Statistics reports that there were 33,653 new housing starts in the final three months of  last year.

But private sector housing starts fell by 2.7 per cent, from the level seen in the September quarter and by 7.7 per cent over the year.

The figures, for other kinds of housing, such as flats, were even more dramatic.

These fell by 13.9 per cent in the December quarter and 17.4 per cent over 2011.

All of these figures are seasonally adjusted.

The Bureau also reported that the number of new finance deals approved, for owner occupied housing, fell by 1.2 per cent, in the 12 months to the end of January.

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