Another day, another bout of tomfoolery from the media and politicians on bank home loan rates, with only a small outbreak of sense from a senior Reserve Bank official yesterday on how the cost of bank funding has risen in recent months, and how there has also been a fall in domestic credit spreads for banks in the past few weeks as conditions improve in Europe.
Just how long Europe will remain relatively stable is another thing. But with the European Central Bank running another huge loan auction at the end of this month of three-year funding, any fallout from Greece and an impending snap election, might not be as rough as it could have been last October.
But while we watch Europe, how about the local media and politicians stop bashing banks and give us some context on home loan rates? We know that home lending rates don’t impact all bank customers: people who own their houses outright are not impacted, renters aren’t, nor are retirees . But they are impacted by movements in deposit rates. Very little has been written about how the banks (and the RBA) have done savers and retirees a service by leaving deposit rates higher (The CBA this week increased its six-month deposit rate by 0.20%, as well as lifting its mortgage rate!).
But we haven’t heard or seen any context for home loan rates after the small increases of the past week. In fact the increases leave home loans rates still about 0.4% under the level they were before the first rate cut (of 0.25%) last November.
The NAB’s new rate is (for the standard variable loan) 7.31% (7.72% before November), the ANZ’s new rate is 7.36% (7.80%), the CBA’s is 7.41% (7.81%) and Westpac’s is 7.46% (7.80%). They are very close to the average for home mortgage rates (standard terms) since 1996, according to the RBA.
In last Friday’s first Statement of Monetary Policy for the year, the RBA said: “Overall, the average rate on outstanding housing loans (fixed and variable) has fallen by 44 basis points since the end of October, to be 17 basis points below its post-1996 average.”
The rate rises chewed up about 0.10% of that margin, show home loan rates remain just under the average since 1996, which isn’t onerous, even accounting for the increased size of mortgages.
For about half those holding mortgages, there won’t be an impact because they will continue paying off more than they have to. The new, higher rates only impact the most recent home buyers, as they always do, year in year out.
And the central bank also pointed out that banks now depend on deposits for more than half their funding: “The composition of bank funding has continued to shift towards deposit liabilities, reflecting solid growth in household term deposits. The deposit share of bank funding is now at its highest level since 1998, at just under 52%.”
The RBA’s assistant governor, in charge of financial markets, Guy Debelle yesterday rejected claims that the bank rate rises were limiting monetary policy. Answering questions after making a detailed speech in Sydney on the impact of the eurozone problems on Australian financial markets, Debelle said:
”After achieving the right interest rates setting … whether it’s exactly right week by week is not as important as that it is right month by month. I don’t think that has changed materially at all,” he said, answering questions at the seminar. ‘When we move interest rates it is still going to have some impact on lending rates. ‘The fact that relationship is not exactly one for one makes our life a little harder than it otherwise would be, but it is a hell of a lot easier than [the position of central banks] in a lot of other countries.”
Debelle said the recent improvement in sentiment in Europe had produced a “a more positive story than it was at the end of the last year. The major instigator of this change, in my opinion, was the ECB’s three-year liquidity operation. Whether this happier state of affairs persists is difficult to tell. There have been outbreaks of optimism over the past couple of years which were dashed. I think the only thing which is certain, is that uncertainty is likely to persist for some time to come.”
And that means bank funding will continue to be volatile and with the downward pressure on profit margins from weak revenue growth, bank earnings and rates will remain squeezed as well. That means there will be more employment changes in coming months.
But the trend right now is for domestic bond margins for banks to narrow, taking the pressure off those margins, as he said yesterday: “In the past few days, there has been a sizeable narrowing of spreads in the secondary market on the domestically issued covered bonds, to around 140 points over swap. This narrowing in bank credit spreads was confirmed by the unsecured issuance last week.”
That was an issue of unsecured bonds by the NAB, which were sold at the same margin as an issue of covered bonds (secured) in January.