CBA Widely Expected To Raise Interest Rates Independently

Australian banking major, CBA may become the first lender to raise its interest rates independently of the Reserve Bank of Australia.

In justifying its decision, the lender said that its net interest margin was under pressure from higher costs.

CBA, which this week reported the highest ever profits for an Australian bank was downgraded by many analysts after its $5.66 billion half year net profit was dissected by financial markets.

UBS downgraded the rating on CBA from a buy to neutral, while cuts to the earnings forecasts for the next two years were made by up to 4 per cent.

Speculation has also grown that the Australia’s largest lender by market capitalisation would be the first bank to raise its interest rates out of synch with that of the Australian central bank.

It is unlikely that any of Australia’s lenders will make any changes to interest rates prior to the Federal election which is scheduled to take place on August 21st.

Ralph Norris CBA’s chief executive says that the lenders cost of funding an average mortgage is likely to increase by at least 40 basis points over the next year, which in turn would increase the pressure on the lenders profit margin.

The pressure intensified in the second half of CBA’s previous financial years when margins fell from 2.18 to 2.08 per cent primarily because of higher funding costs and retail deposit rates.

Craig Williams, banking analyst with Citigroup Financial Markets says that whilst a rate hike not in synch with the central bank would be unpopular with the public, he believes that the lenders with the largest mortgage portfolios would feel the most pressure to raise rates as their margins were squeezed.

Westpac has a $250 billion mortgage book, including St George, while CBA’s is worth about $290 billion.

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