Earlier this week, the Reserve Bank of Australia elected to keep the official cash rate on hold at 1.50% for a record 23rd consecutive meeting.
Yet an unchanged official cash rate hasn’t stopped the big banks increasing variable home loan rates recently. After Westpac (ASX: WBC) moved first, raising standard variable home loan rates by 0.14% last week, ANZ (ASX: ANZ) and Commonwealth Bank (ASX: CBA) followed this week, raising their standard variable home loan rates by 0.16% and 0.15%, respectively.
But why are the banks raising rates “out of cycle” ie without any increase in the official cash rate?
It’s due to increases in the cost of one of the banks’ main source of funding.
While all the big banks source a majority of their funding from deposits – for example, Commonwealth Bank obtains 68% of its funding from deposits – their other major source of funding is the wholesale market.
The cost of wholesale funding is based on the 90-day bank bill swap rate (BBSW). It’s important to note that changes in the RBA cash rate have little, if any, direct effect on changes in the BBSW.
Instead, the BBSW is determined by the forces of supply and demand and the rates that institutional investors and other banks – both here and overseas – are willing to lend to the big banks.
Although the RBA cash rate has remained steady at 1.50%, the BBSW has risen recently, from a low of 1.69% in October 2017 to a high of 2.12% in June before settling to around 1.95% currently.
While the banks have traditionally adjusted home loan rates in response to changes in the RBA’s cash rate – hence the allegations that the above increases are “out of cycle” – the rise in the BBSW is why three of the big banks have just raised their standard variable home loan rates.
To be fair, though, although the BBSW has been at higher levels for months, the banks had held off raising home loan rates for as long as possible.
In light of the ongoing revelations of unethical and even potentially criminal activities by big bank employees at the Financial Services Royal Commission, this is a sensible approach. Why risk further government and community disgust by raising home loan rates “out of cycle” and during a Royal Commission too?
I’d guess that the banks had been hoping that the BBSW would fall from its recent elevated levels and thereby allow them to avoid making such a politically sensitive decision at such an inopportune time.
Unfortunately for them – and borrowers – the BBSW has remained elevated, and the banks have been forced to act.