Official interest rates on hold, but the out-of-cycle bank hikes keep coming

The RBA is almost certain to leave official interest rates on hold when it meets next Tuesday, but that hasn’t stopped lenders hiking rates out-of-cycle. 

Heritage Bank is the most recent bank to hike, joining Bank of Queensland, AMP, Auswide and IMB in raising variable home loan interest rates over the last week. 

As the cost of funding puts the squeeze on the banks’ profit margins, some lenders are choosing to pass some of the cost onto borrowers.

RateCity spokesperson Sally Tindall said if the bank bill swap rate (BBSW) continues to rise we will see more lenders joining the party.

“Banks are weighing up whether they can wear the rising costs, or hike rates and risk customer backlash.

“After months of negative press generated by the Royal Commission, our banks are treading a fine line.

“We’ve seen a handful of smaller lenders hike rates, but so far nothing from the big four. It will be interesting to see how long they hold out.”

History of out-of-cycle rate hikes

In the decade prior to 2008, Australia’s major banks moved their variable rates in line with the cash rate.  When the RBA made a cut, so did the banks and by the same amount. When our central bank hiked, the banks followed suit.

As a result, the margin between the RBA cash rate and the major banks’ standard variable rates was consistently 1.8 percentage points, while the margin between their discounted variable rates was by and large 1.2 percentage points.

But as the global financial crisis unfolded, the costs of funding started to climb, and Australian banks began to feel the pinch.

In January 2008, the major banks made their first out of cycle rate hike in almost nine years, sending shock waves through the public and resetting the industry standard for how interest rates are set. It is no longer an RBA-led decision. Over the last decade we have seen banks make their pricing decisions on a wide range of competing factors, leading to an ever-growing gap between the cash rate and the banks standard and discounted variable rates. 

Source: RateCity.com.au, RBA Indicator lending rates, RBA cash rate history. 

Rate Forecaster – July 2018

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