Why the banks say interest rates need to rise

With politicians starting to weigh in on the controversial debate as to whether or not lenders are within their rights to up interest rates independent of the Reserve Bank, banking chiefs are now speaking up in defence of their intentions.

So do the banks have a valid point when it comes to interest rate hikes made outside the RBA?In an article recently published in The Australian, chief executive of Westpac Gail Kelly believes they do. She says funding costs will continue to rise in the next 18 months for structural reasons and the banks will have to address this issue.      

“We have a particular view on what’s occurred with funding costs. I think it’s been clear . . . that the rise in funding costs have been a direct result of the global financial crisis and the government will have a different view of the extent of it and just how the banks should deal with that situation,” said Mrs Kelly.

However, she denied that her comments in relation to rising funding costs were any type of indication that Westpac is intending to lift rates ahead of an expected increase from the RBA in November.

According to Treasurer Wayne Swan, the banks are already making a healthy profit and therefore should have no need to push interest rates up above any official moves from the RBA, particularly given that their net interest margins are back above pre-GFC levels.

Mrs Kelly has a different perspective though, hinting that the inevitable rise in funding costs would have to be passed on to customers in some form.

She said, “We can look into cost funding and we can look into our profile of the costs over the next 18 months, and we can see that the cost to us of raising money. . . is going up.”

She adds that this is a result of the banks replacing offshore wholesale borrowings made prior to the GFC with more expensive funds and changes in the retail deposit market.

“For example, before the GFC, online deposits were paying the cash rate or around the cash rate and now, of course, online deposits are paying well above the cash rate, so overall average deposit costs are above the cash rate and lending costs haven’t gone up as much,” explained Mrs Kelly.


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