RBA may respond with easing: Westpac's Evans

RBA may respond with easing: Westpac's Evans

This article was written by Michael Roddan first published October 16 in the Business Spectator

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Westpac says the Reserve Bank of Australia may react to tighter financial conditions by cutting interest rates, after the mortgage lender unexpectedly hiked rates on its variable home loans on Wednesday.

The bank's decision to go it alone, at a time when the RBA has official rates at their lowest point on record, has been criticised by Treasurer Scott Morrison as excessive.

But the upward move comes amid central bank concerns that low rates are fuelling a hot property market which could upset the stability of the financial system.

The other big banks are expected to follow Westpac's lead and tighten access to loans. Westpac, Australia's second-largest lender, said its move was designed to help the company meet increased regulatory capital holding requirements.

Westpac's economist Bill Evans said historically the banks have tended to move in similar, although not identical tranches. But Mr Evans said if the four pillars, which control around 80 per cent of the domestic banking sector, all lifted rates, the RBA would likely loosen monetary policy.

"If there was a marked across-the-board increase in retail interest rates, indicating a sharp tightening in financial conditions, then the bank may see the need to offset that move," Mr Evans said.

Macquarie senior economist James McIntyre, who believes the big banks will follow Westpac's lead, said the lender's decision to hike rates "all but seals the deal" for a November cut from the RBA.

The RBA's periodical financial stability review, released on Friday, issued an "uncharacteristically forthright" warning to the banks on the need to be vigilant and maintain tighter lending standard, CommSec noted.

"The financial stability review reads a bit like a report card on the banking sector and in that context Aussie banks have been given a pat on the back for the efforts to ensure higher quality loan books," CommSec chief economist Savanth Sebastian said.

"However there is no doubt there is a much more concerned tone from policymakers about the outlook."

The key was to ensure that lending standards were not being compromised, he said.


The RBA noted that the “risks to the banking system have somewhat increased over the past six months” but “tighter lending practices will, over time, leave the industry better placed to cope with any future deterioration in the housing market and the broader economy”.

"Banks also report that they are becoming increasingly wary of lending to property developers in markets that look oversupplied," the RBA's review said.

AMP Capital Investors chief economist Shane Oliver is tipping a November rate cut but Westpac said there was insufficient information to change its outlook and forecast a cut at the moment.

"History also showed us that even when the banks tightened and the Reserve Bank had an explicit easing bias it still took three board meetings to decide to offset the effect of the banks’ moves," Mr Evans said.

Still, it was by no means certain that history would repeat itself, he added.

"Our position is that the case for the type of net easing we saw in 2012 is not strong but the Reserve Bank, which targets retail interest rates, may decide at some point to offset any tightening by the banks to restore retail rates to those prevailing at the time of the October board meeting when the bank was comfortable with financial conditions and policy settings," Mr Evans said.

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