The main story last week was the announcement by Westpac to increase its variable owner occupied and investor lending rates by 20 basis points due to the increased regulatory requirements for mortgages – the first increase in owner occupier rates in five years. This accompanied the announcement of a 6% increase in Westpac’s statutory net profit (to $8bn) and the plans to raise $3.5bn of capital through a heavily (13.6%) discounted share issue. At the end of July, Westpac (and most of its peers) raised rates for investor lending by 27 basis points to counter the specific (APRA’s 10% hurdle) risks to this lending segment. Focus will now turn to the other banks to see if they respond to the Westpac lead and also increase lending rates.
The problem for the economy is that this rate rise is a blow to the 40% of Australian households who have a mortgage and therefore it will be a hit to spending. If the Reserve Bank is looking to offset this and the flow-on effect to household budgets and consumer spending, then the RBA may have to cut the official cash rate once again.
It appears that the RBA was expecting some movement in mortgage rates, with the RBA Governor noting in response to a question on capital requirements after a speech in July that: “So I would imagine it will result in some rise in mortgage rates from the major banks, it’s supposed to, that’s the point.” While the move by Westpac (and only Westpac at the time of writing) may not justify a rate cut, nonetheless markets have reacted by increasing the probability of a rate cut this year to over 60%, up from 45% last week.
Chart: Implied cash rate from futures market