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.”

Figures have recently been released by the Australian Bureau of Statistics showing that in September home loans in Australia increased for the third month in a row. The level of the increase was higher than the level that had been predicted by many industry experts, and indicated that confidence levels amongst consumers has been increasing.

Although there was uncertainty in September with regards to whether interest rates would increase this does not seem to have put off consumers, who are said to have taken the threat of possible increases in their stride. Whilst the cash rate went up earlier this month from 4.5 percent to 4.75 percent, in September, which is the month on which the ABS figures were based, any talk of a cash rate increase was mere speculation.

September saw home loans increase by 1.3 percent according to the figures from the ABS, and this was higher than the 1 percent increase that some industry officials had predicted. The September increase followed a 1.1 percent increase in August. ICAP analyst, Adam Carr, said that it was clear that lending levels were increasing, and that the figures came as good news.

Rising interest rates and a shortage of affordable housing is set to put increased pressure on the property market, and this will invariably have a knock on effect on the home loans sector. However, over the past couple of months the increased stability of the economy in Australia coupled with increased consumer confidence has helped to boost home loan figures.

Carr said that there was fundamentally nothing wrong with the Australian lending markets, adding that the established lending market was doing very well. However, he added that people could start to lose confidence as a result of concerns about the way in which the cash rate would continue to go.

Following the cash rate rise from the Reserve Bank of Australia the Commonwealth Bank quickly took steps to increase the rates on its variable rate mortgages. It has been reported that other major Australian banks are getting geared up to follow suit, and this could also impact upon consumer confidence over the remainder of this year.

Referring to the home loan figures for September the ABS reported that the value of loans for homes that were owner occupied increased by 0.6 percent to a value of $13.75 billion. There was also an increase in the value of loans for investment properties, which increased to $6.63 billion, reflecting an increase of 1.7 percent. The ABS also outlined figures relating to commitments to buy homes, with figures showing that there was a fall in the number of commitments to buy new homes, which fell by 3.2 percent following seasonal adjustments. However, there was an increase in the number of commitments to buy established homes, which increased by 1.6 percent.

Mr Carr said: "The established lending market is doing very well. The numbers show there is nothing structurally wrong with the lending markets but people have been spooked by the pace at which rates are going.” He added: “The lending numbers and approvals numbers both point to on-going price gains."

Written by Michael Sanz

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