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CBA, ANZ match RBA's 25bp interest rate rise

THE Commonwealth Bank and ANZ have passed on today's interest rate rise to customers after the RBA raised rates to 4 per cent.

The Commonwealth bank was the first to announce its standard variable mortgage rate would rise by 25 basis points from 6.61 per cent to 6.86 per cent.

The bank’s deposit rates for savings accounts will also increase by the same amount.

ANZ said it would raise the interest rate on its standard variable home loans by 25 basis points to 6.91 per cent from March 5, matching the RBA’s interest rate hike.

Interest rates on selected deposit products would also rise by 25 basis points, ANZ said in a statement today.

The decision by the banks to keep the rate rise in line with the Reserve Bank’s official moves will increase pressure on its rivals to implement the same change.

The RBA has indicated that Australian homeowners should prepare for higher interest rates throughout 2010, as the economic recovery gathers pace.

The decision to increase the official cash rate by 25 basis points to 4 per cent in March met the expectations of the financial markets.

In a statement, RBA governor Glenn Stevens said the “risk of serious economic contraction” had passed, and an economy that was growing faster than expected would warrant higher interest rates for the rest of the year.

The increase today will add about $50 to the monthly repayments of an average mortgage in Australia.

“Interest rates to most borrowers remain lower than average,” Mr Stevens said.

“The board judges that, with growth likely to be close to trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average.

“Today’s decision is a further step in that process.”

Mr Stevens said the economic recovery in Australia was under way, but the housing market had started to show signs of cooling.

“Credit for housing has been expanding at a solid pace and dwelling prices have risen significantly over the past year,” he said.

“New loan approvals for housing have moderated a little over recent months, however, as interest rates have risen and the impact of large grants to first home buyers tailed off.”

Treasurer Wayne Swan said rate rises were inevitable as the economy recovered.

"The economy is recovering and rate rises are an inevitable consequence of a recovering economy that is outperforming the rest of the world," he told reporters.

The decision today makes the RBA the first central bank in the G20 to raise official rates in 2010 after it was the first to kickstart the tightening cycle last year.

The major economies of the US, Europe and Japan are unlikely to begin tightening monetary policy anytime soon. The chairman of the US Federal Reserve Ben Bernanke last week dampened expectations that the US would raise lending rates soon by describing the economy recovery as "nascent".

The Australian dollar immediately shot higher to US90.58c but lost some ground to be trading at US89.82c by late afternoon.

UBS chief economist Scott Haslem said there could be two more rate hikes of 25 basis points before interest rates reached the RBA’s "average" level.

"The RBA sees the cash rate/borrowing rates as still below average, signalling clearly an ongoing bias to tighten," he said.

"So what’s average? We estimate economy-wide borrowing rates, post today’s hike and assuming lending rates move in line are still around 50 basis points below average, when wider borrowing margins to the cash rate are considered.

"To this end, more than likely, the RBA intends to lift the cash rate, at the very least a further 50 basis points, to get borrowing rates in line with trend GDP and target CPI."

The majority of economists expect the official cash rate to be 4.75 per cent by the end of the year.

The futures market, which tipped the March hike, predicts rates could be up 110 basis points higher by this time next year.

ANZ senior economist Shane Lee said the movement in the unemployment rate, now at 5.3 per cent, would be one of the most important indicators of the economy’s recovery for the RBA.

"The RBA is open to raising rates next month and it would probably take a weak run of data to change its mind on this, given its apparent assessment of the impact of last year’s rate rises," Mr Lee said.

"Another sharp fall in the unemployment rate would probably seal a lift in the cash rate in April."

The Housing Industry Association (HIA) senior economist Ben Phillips said first-home buyers who entered the market to take advantage of the government’s $14,000 grant last year would be most impacted by the RBA’s four interest rate rises.

The repayments of a $300,000 mortgage on an average standard variable loan have now increased by $216 a month from September last year to now.

The HIA has estimated the monthly repayments would have risen from $1760 to $1976 as variable rates moved from 5.8 per cent to 6.9 per cent.

"First home buyers in 2009 will have budgeted for moderate interest rate increases through 2010. Unnecessarily large increases will stretch these budgets to the limit and drive away potential new first home buyers," Mr Phillips said.

"The impact of government stimulus in housing will fizzle quickly over 2010 and maintaining a low interest rate environment will be fundamental to a much needed new home building recovery extending beyond first time buyers and social housing provision."

 

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