The banking industry has welcomed comments from the central bank acknowledging their rising funding costs in the wake of the euro zone debt crisis.
Australian Bankers’ Association (ABA) chief executive Steven Münchenberg said the comments provided some explanation of why Australia’s four major banks had decided to raise interest rates, after the RBA kept the cash rate on hold.
“Banks understand there is a lot of concern in the community that some banks have moved their mortgage and small business interest rates independently of movements in the RBA’s official cash rate,” he said.
“For over 10 years banks moved in step with the RBA and that created the reasonable expectation that the RBA cash rate was the only factor determining bank funding costs and the interest rates banks charged.
“Unfortunately, the global financial crisis has shown that this is not the case.”
Australia’s big four banks – Commonwealth, ANZ, National Australia Bank and Westpac – in the past week have all raised the standard variable rate they charge on mortgages, citing the higher cost of sourcing the money.
Their decisions have drawn public criticism and raised the ire of federal Treasurer Wayne Swan, who urged borrowers to shop around for a better deal.
Speaking at the Bloomberg Seminar in Sydney, RBA Assistant Governor Guy Debelle said banks faced significantly higher borrowing costs as a result of the turmoil in Europe.
“This global repricing of bank debt has clearly affected the Australian banks’ wholesale funding costs,” he said.
“Investors are demanding much higher compensation for bank credit risk now than they were in mid-2011.”
Increased costs – and their flow through to the lending market – were factors considered by the RBA when assessing the position of Australian markets, Dr Debelle said.
“The way it (price) flows through to lending rates, both mortgages and business lending rates, is something we can take into account when assessing the overall stance of financial conditions,” he said.
Turning to the euro zone, Dr Debelle said the continent had made some inroads with the European Central Bank’s decision to lend 500 billion euros ($A620.31 billion) to commercial banks in December.
This had provided a much-needed boost to liquidity and allowed the banks to meet their obligations, he said.
“So far this year, that has been a more positive story than it was at the end of the last year,” Dr Debelle said.
However, he remained cautious in his outlook for the continent as it tries to move on from the crisis.
“Whether this happier state of affairs persists is difficult to tell,” he said.
“There have been outbreaks of optimism over the past couple of years which were dashed.”
