Regulatory pressure could see smaller banks lift rates

The majors have all said that their rate increases are the result of the need to hold additional capital to meet regulatory requirements. However, AMP Capital chief economist Shane Oliver highlighted that APRA still looks at the smaller banks.

“Big banks have increased their rates for both owner-occupiers and investors,” Mr Oliver said.

“Some of that could flow through to the other banks, causing them to violate the APRA-imposed 10 per cent limit to growth on investor lending.

"They are certainly not going to be cutting rates. If they are flooded with requests for mortgages, they might be tempted to raise rates.”

Macquarie Bank confirmed yesterday that it had raised its variable rates by 20 basis points, while St. George announced late on Friday that it had increased its rates by 15 basis points.

St. George is a wholly owned subsidiary of Westpac Bank, which was the first of the majors to hike its rates by 20 basis points on 14 October.

Last week, CBA, NAB and ANZ joined Westpac by hiking variable rates for owner-occupiers and investors.

Listed lender Heritage Bank told Mortgage Business that it will be "monitoring what happens in the market" in coming weeks to see what impact these increases have.

“Any actions that cause people to rethink lending with the big banks definitely makes smaller lenders like Heritage more attractive,” Heritage Bank head of third-party channels David Ure said.

“The big benefit is that these increases may encourage people to look further afield and realise that they can get great value from mutuals like Heritage.”

While the industry waits to see how the smaller banks respond to the recent rate hikes, all eyes are now on the Reserve Bank's rate announcement next week.

According to Mr Oliver, while the RBA does not wish to cut rates again, it also won’t want to see households with a mortgage paying higher rates given the risk this will pose to consumer spending at a time when economic growth is still weak.

“So we remain of the view the RBA should and ultimately will cut rates again to ensure that this does not happen,” Mr Oliver said. “We have pencilled in a 0.25 per cent rate cut at the November meeting, but the RBA may need more convincing and so there is a risk it could be delayed into early next year.”

Mr Oliver believes that the majors will not pass on a full rate cut from the Reserve Bank, instead passing on the gap between their recent rate increases and the RBA’s reduction.

“If the RBA cuts the cash rate in November by 25 basis points then Westpac customers would most likely see a 0.05 per cent cut in their mortgage rate, because that is what would be passed on – it is the difference between the amount by which Westpac wanted to increase its rates (20 basis points) by and how much the RBA cut (25 basis points).”

Mr Oliver noted that the relationship between variable mortgage rates and the RBA’s official cash rate has been expanding since the GFC.