Double Whammy for Australian borrowers
Lisa Macnamara | April 26, 2008
AUSTRALIAN home borrowers are doing it tougher than their British and US counterparts as the global credit crunch and surging domestic inflation push rates even higher.
National Australia Bank and ANZ are the latest of the major lenders to lift their standard variable rates by 10 basis points each, with NAB choosing yesterday to do it.
ANZ has the highest of the variable rates, along with St George Bank, at 9.47 per cent.
NAB is at 9.46 per cent while Westpac is at the bottom of the ladder at 9.37 per cent. It comes as this week's high inflation numbers in Australia dampened hopes for an official rate cut, while the banks continued to lift rates, irrespective of the Reserve Bank leaving the cash rate unchanged at 7.25 per cent.
"Two things are working against Australian borrowers: the fact that the Reserve Bank has been raising rates because of inflation, and the credit crunch," AMP Capital chief economist Shane Oliver said yesterday. "In the UK, which is the most comparable to Australia, borrowers there have only had to contend with the credit crunch. In the US, existing borrowers who are on fixed rates haven't been affected."
Australia's average standard variable home loan is now above 9.4 per cent, according to Cannex. The UK average is 7.11 per cent, with many of the high street banks having ignored the Bank of England's last rate cut to 5 per cent. In the US, most borrowers are on long-term fixed rates, with the popular 15-year fixed rate now at 5.62 per cent, and shorter terms slightly cheaper. New entrants face rates just above 6 per cent for 30-year money.
JPMorgan chief economist Stephen Walters says the global liquidity squeeze has created a new paradigm in Australian banking behaviour, adding to the burden on mortgages.
"Until the last three or four months, whenever the RBA moved rates the banks moved in lock step with that," Mr Walters said. "But this is a new paradigm in that banks are moving rates independent of the Reserve Bank, and we saw that in January when the RBA didn't even have a board meeting, let alone put up rates, and the banks put up rates by 20 to 25 basis points."
Mr Walters said local interest rates were close to peaking but banks could continue to drive them higher to combat escalating funding costs. "We can't put a time frame on it but within some reasonable period of time markets will go back to closer to normal, at which time the banks will start moving their rates more in line with the Reserve Bank."
But Dr Oliver said the banks' pricing power might increase as the credit turmoil claimed a number of non-bank lenders and lower competition in the market.
"The pricing power of the banks has arguably gone up and this may have longer-term implications," Dr Oliver said.
A blowout in Australia's inflation, driven by a strong economy, has delivered a local 90-day bill (cash) rate of 7.845 per cent, higher than the official rate of 7.25 per cent, against the Bank of England equivalent at 5 per cent and the US Fed funds rate of 2.25 per cent. "Mortgage rates went up and that's because their funding costs are going up and banks are trying to compensate for that," Mr Walters said. "The Bank of England governor was asked last week if he had lost control of monetary policy and his answer was no, because interest rates would have been a lot higher had they not cut rates."
Dr Oliver said that in Australia there was also the view that rates might have been higher without the credit crunch.
"If the credit crunch hadn't come along, the Reserve Bank would have jacked up rates by more, so Australians could have been paying the same mortgage rates that they are now," he said.
In the US, about 80 per cent of borrowers are on fixed-rate mortgages.
And while tighter lending standards have caused loan applications to plummet, 30-year mortgages this week climbed up to more than 6 per cent for the first time in six weeks.
The rates are tied to fluctuations in the debt market, which has been pushed up on the back of the credit tightening.
"Finance is a lot cheaper in the US and UK so to say our rates are higher is true, but they should be, because we do have an economy that is growing more quickly and we also have inflation that is much higher," Mr Walters said.
PAIN GAUGE
Official interest rates
Australia 7.25pc
UK 5.0pc
US 2.25pc
Average mortgage rates
Australia (variable) 9.41pc
UK (variable) 7.11pc
US (fixed) 5.62pc
Lisa Macnamara | April 26, 2008
AUSTRALIAN home borrowers are doing it tougher than their British and US counterparts as the global credit crunch and surging domestic inflation push rates even higher.
National Australia Bank and ANZ are the latest of the major lenders to lift their standard variable rates by 10 basis points each, with NAB choosing yesterday to do it.
ANZ has the highest of the variable rates, along with St George Bank, at 9.47 per cent.
NAB is at 9.46 per cent while Westpac is at the bottom of the ladder at 9.37 per cent. It comes as this week's high inflation numbers in Australia dampened hopes for an official rate cut, while the banks continued to lift rates, irrespective of the Reserve Bank leaving the cash rate unchanged at 7.25 per cent.
"Two things are working against Australian borrowers: the fact that the Reserve Bank has been raising rates because of inflation, and the credit crunch," AMP Capital chief economist Shane Oliver said yesterday. "In the UK, which is the most comparable to Australia, borrowers there have only had to contend with the credit crunch. In the US, existing borrowers who are on fixed rates haven't been affected."
Australia's average standard variable home loan is now above 9.4 per cent, according to Cannex. The UK average is 7.11 per cent, with many of the high street banks having ignored the Bank of England's last rate cut to 5 per cent. In the US, most borrowers are on long-term fixed rates, with the popular 15-year fixed rate now at 5.62 per cent, and shorter terms slightly cheaper. New entrants face rates just above 6 per cent for 30-year money.
JPMorgan chief economist Stephen Walters says the global liquidity squeeze has created a new paradigm in Australian banking behaviour, adding to the burden on mortgages.
"Until the last three or four months, whenever the RBA moved rates the banks moved in lock step with that," Mr Walters said. "But this is a new paradigm in that banks are moving rates independent of the Reserve Bank, and we saw that in January when the RBA didn't even have a board meeting, let alone put up rates, and the banks put up rates by 20 to 25 basis points."
Mr Walters said local interest rates were close to peaking but banks could continue to drive them higher to combat escalating funding costs. "We can't put a time frame on it but within some reasonable period of time markets will go back to closer to normal, at which time the banks will start moving their rates more in line with the Reserve Bank."
But Dr Oliver said the banks' pricing power might increase as the credit turmoil claimed a number of non-bank lenders and lower competition in the market.
"The pricing power of the banks has arguably gone up and this may have longer-term implications," Dr Oliver said.
A blowout in Australia's inflation, driven by a strong economy, has delivered a local 90-day bill (cash) rate of 7.845 per cent, higher than the official rate of 7.25 per cent, against the Bank of England equivalent at 5 per cent and the US Fed funds rate of 2.25 per cent. "Mortgage rates went up and that's because their funding costs are going up and banks are trying to compensate for that," Mr Walters said. "The Bank of England governor was asked last week if he had lost control of monetary policy and his answer was no, because interest rates would have been a lot higher had they not cut rates."
Dr Oliver said that in Australia there was also the view that rates might have been higher without the credit crunch.
"If the credit crunch hadn't come along, the Reserve Bank would have jacked up rates by more, so Australians could have been paying the same mortgage rates that they are now," he said.
In the US, about 80 per cent of borrowers are on fixed-rate mortgages.
And while tighter lending standards have caused loan applications to plummet, 30-year mortgages this week climbed up to more than 6 per cent for the first time in six weeks.
The rates are tied to fluctuations in the debt market, which has been pushed up on the back of the credit tightening.
"Finance is a lot cheaper in the US and UK so to say our rates are higher is true, but they should be, because we do have an economy that is growing more quickly and we also have inflation that is much higher," Mr Walters said.
PAIN GAUGE
Official interest rates
Australia 7.25pc
UK 5.0pc
US 2.25pc
Average mortgage rates
Australia (variable) 9.41pc
UK (variable) 7.11pc
US (fixed) 5.62pc