Retail bank pressure may force rate cut

The Reserve Bank of Australia could be forced to cut the official cash rate again if
retail banks continue to face pressures from rising funding costs, economists say.
The Reserve released the minutes of its June board meeting on Tuesday, saying there
was "no pressing case" for another rate cut, but there is scope for further easing
in policy if needed.
But the minutes did not take into account the Commonwealth Bank's decision last
Friday to raise its standard variable mortgage rate and business lending rates by 10
basis points.
The nation's largest home lender blamed the rising cost of funding for its decision.
RBS Australia economist Felicity Emmett said the Commonwealth Bank's decision is
relevant to the outlook for official interest rates.
"This ongoing pressure on funding costs will in turn put upward pressure on mortgage
rates over coming months, which would add pressure on the RBA to cut the cash rate
again," Ms Emmett said.
"This pressure is likely to intensify as unemployment rises further."
The Commonwealth Bank also increased its fixed-rate mortgage rates, as have other
major banks, pointing to the rise in wholesale interest rates.
The very nature of fixed-rate loans means any interest increase only affects new
customers, not existing home buyers.
National Australia Bank said it had no plans to change its variable rate, but
described the repricing of its fixed rates as "business as usual".
"Longer term wholesale continues to be volatile and upwards," NAB general manager of
mortgages Steven Shaw told ABC radio.
Yields, or interest rates, on three-year government bonds have risen by 100 basis
points since late April to about 4.5 per cent on Tuesday.
Asked if NAB would pass on another official cut, Mr Shaw said this would depend on
several factors - including the levels of the cash rate, what the wholesale markets
are doing and the competitive environment.
The Reserve cut the official cash rate by 425 basis points between September last
year and April, taking it to a 49-year low of 3 per cent.
Retail banks have passed on just under 400 basis points of the official reductions
to their home loan customers.
Rising debt yields were again a talking point in parliamentary question time.
Opposition treasury spokesman Joe Hockey noted that yields on 10-year government
bonds had risen from 3.7 per cent in March to 5.4 per cent on Tuesday.
He asked Treasurer Wayne Swan whether he was prepared to claim there is no
relationship between the government's record level of projected borrowings and the
dramatic increase in interest rates on long-term bonds in the past three months.
"It's pure baloney for the shadow treasurer to assert that levels of borrowing that
the government has not even engaged in are somehow having an impact on the 10-year
bond rate," Mr Swan replied in parliament.
"It just demonstrates how opportunistic, how desperate this opposition has become."
He said long-term bond rates are affected predominantly by what is happening in
international financial markets, and that borrowings by Australia are a tiny
percentage of global bond issuance.
The Reserve's minutes said Australian government bond yields had tracked movements
in global yields relatively closely, maintaining a broadly steady spread - or
difference - to US government yields.
The minutes also noted that Australian banks had continued to compete strongly for
deposit inflows.
"Special rates on deposits had been considerably higher than bank bill yields so far
this year," the minutes said.
"This was putting upward pressure on funding costs."