The Reserve Bank of Australia has announced that the official rate is to be kept on hold at 4.75 percent, which means that it will now remain steady for the next two months. This comes after the surprise decision that was made last month, which saw the central bank announce an increase in the official rate, and resulted in some of the major banks hiking up mortgage rates by much more than the 25 percent basis point increase.

The decision to keep rates on hold this time will not have come as a surprise to most industry officials, as it was a move that was widely expected. An economist from HSBC described the latest official rate decision as “almost a fait accompli” adding that mortgage rates increased by around 40 basis points last month “which is plenty of tightening for now”.

The board meeting held this week was the last one until February 2011, which means that consumers have the peace of mind that the official rate will now remain static for another two months. Glenn Stevens, the Governor of the central bank, said that consumers were continuing to show caution when it came to spending and borrowing, and that this had led to a noticeable increase when it came to the household saving rate.

Craig James, a CommSec economist, said that whilst this month's move came as no surprise to the industry many thought that the RBA had moved too early on last month's rate increase. He also predicted that the official rate could now be held on hold until April of next year, stating: "I think the language is showing the RBA relaxed about the situation."

Another economist, Richard Robinson from BIS Shrapnel, also expressed surprise over the rate rise from last month, but said that he was no surprised over this latest decision to keep rates on hold. He added that the housing market had already been experiencing problems but that rate rises by the four big banks following the November rate rise had slowed the market down even further.

After the meeting this week Mr Stevens, the governor of the RBA, said: "Following the board's decision last month to lift the cash rate, and the subsequent increases by financial institutions, lending rates in the economy are now a little above average. The board views this setting of monetary policy as appropriate for the economic outlook."

Economists have also said that the RBA is going to need the leverage to increase rates later on when problems such as skilled labour shortages start to kick in, with many agreeing that the November rate rise came far too soon. One added that inflation was not a big problem at the moment, and although it could become a problem later on increasing the official rate now would do nothing to help that. He said: "We haven't got the housing market driving growth, we haven't got households driving consumption expenditure. Everyone's pretty tentative. Inflation's not really a problem - not yet anyway. It will be later and an interest rate rise doesn't help that."

Treasurer Wayne Swan has lashed out at the Commonwealth Bank of Australia following its announcement that its key lending rates were to increase by almost double the level of the cash rate increase. On Tuesday the Reserve Bank of Australia announced that the case rate would be increased by 25 basis points to 4.75 percent, and since then the CBA has announced that its key lending rates would increase by almost double that level.

The CBA lending rates for variable rate mortgages are being increased by 45 basis points, and this has sparked an angry reaction from Treasurer Wayne Swan. He accused the CBA of being involved in a 'cynical cash grab' and has now said that he is putting together a package of reforms that will see competition within the banking sector improve. The details of the reform package, he said, would be provided next month.

The banking industry body, the Australian Bankers' Association, has defended the decision of the CBA to increase its variable rate mortgage rates by 45 basis points, stating that funding costs had increased on both wholesale and deposit fronts for banks. Steven Munchenberg from the ABA said that it could not be assumed that banks were being unreasonable by increasing rates in this way just because had not bowed to 'bullying by government'.

However, he also said that the banking industry was prepared to consider reforms that were aimed at increasing competition within the sector as long as the reforms were deemed appropriate. In a recent interview he stated: “We would welcome appropriate moves to increase competition.”

Swan has not yet provided details of any of the proposed reforms that will be included in his package. However, Joe Hockey, the opposition Treasury spokesman, has said that Swan should release details of the reforms right away rather than waiting until next month, as the details needed to be released before other major banks started to increase their mortgages rates as well.

In the meantime the Finance Minister Penny Wong has warned that lenders need to be careful about how their customers will view the fact that they have increased or are considering increased their rates by a level that is higher than the increase in the official cash rate. She said that consumers had every right to be upset over the CBA rate increase, adding: “I would encourage other banks to consider how their customers perceive them moving from the official independent Reserve Bank increase.”

Swan said that some customers may be better off actually moving their mortgages if their providers increased rates by too much. He added that often losing customers on mass was the only language that the banking giants understood in circumstances such as these.

Referring to his package of reforms Swan also said that they would be “enduring and lasting and will deliver benefits to the Australian people”. He added: “We are going to empower our regulators with all of the powers that they need to make the system more competitive. And that's what we're doing.”

The Reserve Bank of Australia has announced that the cash rate has been increased by 25 basis points, taking the official cash rate up to 4.75 percent. The move marks the fourth time in five years that the central bank has increase the cash rate on the first Tuesday in November. However, despite this many economists and analysts have expressed surprise over the decision to increase the rate this year.

Out of twenty four economists that were polled prior to the decision being announced seventeen had expected the cash rate to remain on hold this month. For many the decision to increase the cash rate came as a surprise because of the consumer price figures released by the Bureau of Statistics last week, which showed that in the three months to the end of September inflation had remained in line with the central bank's 2-3 percent target.

The increase in the cash rate is now likely to spark concerns over the knock on effect that this will have for borrowers, and how much home loan interest rates will be increased by banks. At present the interest rates on variable rate mortgages are between 7.24 and 7.51 percent. Officials have said that even if the banks only pass on the official 25 basis point increase it could add nearly $50 to the monthly repayments on a $300,000 mortgage that is being repaid over a twenty five year term.

Whilst many may be hoping that the RBA decision will not have too severe an impact on home loan interest rates from banks senior bank officials have been repeating warnings that in the event of the official cash rate rising the interest rates charges by banks on home loans would also have to increase due to higher funding costs.

The news of the cash rate rise comes at a time when many homeowners may be sorting out their finances for the up and coming Christmas period, and for those that are on variable rate mortgages this is likely to cause particular concern because of the timing. Many may already be struggling when it comes to funding their Christmas purchases after a difficult and turbulent financial year, and any rate rises applied by banks on home loans at this particular time could bring added pressure.

Glenn Stevens, the Governor of the Reserve Bank of Australia, made the announcement about the cash rate increase after the meeting held today, and advised that the new 4.75 percent rate would come into effect as of 3^rd November 2010. He also issued a statement following the meeting.

The statement from Stevens read: 'For some time, the Board has held the stance of monetary policy steady, which has resulted in interest rates to borrowers being close to their average of the past decade. This allowed some time to observe the early effects of previous policy changes and to monitor the uncertain global outlook. The Board is also cognisant of differences in the degree of economic strength by industry and by region. However, the economy is now subject to a large expansionary shock from the high terms of trade and has relatively modest amounts of spare capacity. Looking ahead, notwithstanding recent good results on inflation, the risk of inflation rising again over the medium term remains. At today's meeting, the Board concluded that the balance of risks had shifted to the point where an early, modest tightening of monetary policy was prudent.'

http://www.abc.net.au/news/stories/2010/11/02/3055068.htm?section=justin

http://www.rba.gov.au/media-releases/2010/mr-10-26.html

Written by Michael Sanz

Ralph Norris, the CEO of the Commonwealth Bank of Australia, has recently stated that competition is set to return to the Australian mortgage markets, with a number of non-bank lenders showing signs that they are ready to re-enter the mortgage sector again. This follows a mass exit of smaller, non-bank providers from the market during the global financial crisis.

Many non-bank lenders withdrew from the market during the downturn, but Norris believes that they will soon start to return to the market with some already said to be writing mortgages again. The move will increase rivalry in the market, with smaller lenders returning to take on their larger rivals again, and this could come as good news for borrowers, as it will mean greater choice and could result in better deals as the rival lenders compete with one another. Britain's Virgin Money is already said to have restarted Australian operations, and many others are expected to follow suit.

Norris also warned that competition could be further increased by new entrants to the Australian mortgage market that come from abroad. He said that the Australian market presented very good opportunities for offshore banks in places such as Asia, particularly in cases where the banks were currently operating in weak economies.

Mr Norris stated: "Competition is also likely to come from new entrants into the Australian banking sector from offshore. The strength of the Australian economy and our proximity and links with Asia present a very appealing option for offshore banks, particularly for those banks faced with a subdued home economy."
The Commonwealth Bank chief said that a number of factors would be likely to contribute towards greater competition and rivalry in the mortgage sector. He said that increased activity in the securitisation market and rising interest rates would be amongst these factors.

The re-entry of smaller lenders and the entry of new lenders to the Australian mortgage market is likely to cause concern for the larger banks, which gained a monopoly in the market after the smaller lenders withdrew during the financial crisis. The greater competition will mean that larger banks have to work harder to maintain their share of the mortgage market. Mr Norris added that another concern was that some non-bank lenders may not be as strictly regulated as the banking industry.

Speaking at a recent FINSIA conference in Sydney he stated: "As the cost of credit to consumers continues to rise, it does send an invitation to non-banking institutions to explore ways to offer low cost loans. On the upside, this has the potential to promote innovation within the financial sector. On the downside, the risk of non-regulated players entering the market and taking increased risks with the lending and borrowing practices is something for the banks to watch carefully."

He also said that the rivalry and competition that had driven banks to increase riskier lending in the past was still evident, but that the lessons learned during the financial crisis would influence the nature of the competition.

Article Written by Michael Sanz