Reserve Bank expected mortgage increases

The Reserve Bank was fully prepared for retail banks to make large increases to
their lending rates when it decided to lift the official cash rate earlier this
month.
But economists believe a follow-up rate increase in December by the central bank is
unlikely.
The minutes of the Reserve Bank's November 2 board meeting released on Tuesday show
that its decision to raise the cash rate to 4.75 per cent from 4.5 per cent was
again "finely balanced".
The November cash rate increase had surprised many economists with conditions
seemingly little different from when the central bank had sat pat on policy in
October, albeit again after another close board decision.
"With the flow of information over the past month generally suggesting that the
medium-term economic outlook remained one of strengthening economic activity and
gradually rising inflation, the board judged that the balance of risks had shifted
to the point where a modest tightening of monetary policy was prudent," Tuesday's
minutes said.
Still, the minutes offered little new information given the rate decision was soon
followed by the Reserve Bank's in-depth quarterly statement on monetary policy.
But its second-guessing of the retail banks was new.
"Members noted that lending rates might increase by more than the cash rate but this
tendency would not be lessened by delaying a change in the cash rate," the minutes
said.
The report said lending rates had been rising relative to the cash rate since the
global financial crisis, and the board had taken this into account in setting the
cash rate.
"It would continue to take account of any changes in margins in its decisions in the
period ahead," it said.
The banking industry, that has taken the heat from both sides of politics and anger
of customers after the big four banks raised their mortgage rates by between 35 to
45 basis points, seized on the report.
"The RBA minutes recognise that funding costs have been slowly increasing,"
Australian Bankers Association chief executive Steven Munchenberg said in a
statement.
"This gradual increase has had a cumulative effect over the past year that is
significant."
JP Morgan chief economist Stephen Walters believes that with the retail banks doing
some of the "heavy lifting", the Reserve Bank will be on hold at the December 7
board meeting.
"With the domestic and global growth outlook improving, though, we expect the
(Reserve Bank) to lift the cash rate a further 25 basis points in early February, at
the first gathering of 2011," Mr Walters said.
However, such breathing space will be welcomed by homeowners ahead of Christmas, as
it will by small business.
A survey by the Australian Chamber of Commerce on Industry (ACCI) found the gap
between the performance of small and large businesses had never been greater, and is
primarily the result of rising interest rates.
ACCI director of economic and industry policy Greg Evans explained as small business
tends to serve consumer sensitive areas of the economy, it is more vulnerable to
interest rate decisions.
"The Reserve Bank should look beyond the obvious buoyancy of the mining boom and
look at some developments in the real economy," Mr Evans told reporters in Canberra.
"A December rate rise would be potentially crunching for small business .. and we
believe any consideration of a rate rise should be well into 2011".