Australian Banks Likely To Raise Rates Independent Of Central Bank Tightening

The chief operating officer of regional lender Bank of Queensland Ram Kangatharan, says that Australian banks face deteriorating funding conditions which likely cause lenders to raise interest rates independently of the central bank.

Mr. Kangatharan says that the deteriorating funding climate is adding further pressure to banks’ margins.

Australian banking major Westpac last week tapped the wholesale funding market, and issued debt with a five year tenure priced at risk premium that surprised many, suggesting that pressure in the market remains following the European sovereign default crisis.

In an interview with Dow Jones Newswires, Mr. Kangatharan said that whilst the wholesale funding market experienced some improvement, risk aversion had officially returned, and he does not expect to see an improvement in funding costs any time soon.

He added that competition for retail deposits remained especially intense, with the only growth being experienced driven exclusively by hot money chasing special deals.

“On the wholesale side, things are getting tougher, sustainable retail deposit growth is pretty tough in this environment. All of the banks are starting to feel the pinch in terms of deposit margins.” Mr. Kangatharan said.

The result of all the pressure on funding costs means that the major lenders are likely to raise interest rates outside of official hikes by the Reserve Bank of Australia.

Mr Kangatharan says that BoQ is a price taker in the mortgage market.

“As the pressure continues on the majors, they would want to move outside the RBA rates, I think what’s holding them back is election year,” Mr Kangatharan said, referring to a general election expected to be called in coming weeks.

The RBA held official rates steady at 4.50 per cent when its policy board met today.