Gap Between Mortgage, Official Cash Rates at 3.15%

The debate over out-of-cycle interest rate increases by major Australian banks would likely be revived again when the Reserve Bank of Australia (RBA) releases a report of Friday which would show the widening gap between standard home loan rates and the RBA overnight cash rate.

The gap is at 3.15 per cent based on the 4.25 per cent RBA rate and the average standard home loan rate of 7.4 per cent. It is the widest gap between the two rates in about 18 years and the first time the gap grew since 2010.

The banks hiked their interest rates in February by 6 to 10 basis points despite the RBA rate decision on Feb 7 to retain the current overnight cash rate. The lenders, three of which suffered ratings downgrade by Fitch, justified their rate increase to the higher cost of funding from overseas. Their decision was heavily criticised by consumers and the reason the banks cited was doubted by French bank, Societe Generale.

Societe Generale accused the Australian banks of hiking rates to protect their profit margins.

Earlier this week, the National Australia Bank (NAB) also increased its liquidity margin on business loans by 18 basis points to 1.13 per cent. NAB published the hike on Monday, but competitor Commonwealth Bank accused NAB of raising the margin secretly.

Analysts warned that banks would likely go on with boosting their profitability by hiking their lending rates in the coming months amid forecasts that the average cost of wholesale funding will continue to rise until 2015.

Nomura analyst Victor German estimates that Australian banks would need to raise $7 billion extra funds yearly for the next six years, which would likely place more pressure on costs and translate into higher interest rates.

However, as part of protecting their profitability, majority of Australian banks are not increasing their interest rates for savings accounts and term deposits. The Herald Sun reports that an analysis of 200 accounts by Public Defender showed failure by lenders to increase savings and deposit interest rates even if 36 banks hiked their home loan interest rates.

In the case of one bank, it even reduced savings interest rate by 0.15 per cent.

Experts said the widening gap between the mortgage and overnight cash rates are indicators that the link between RBA interest rate policy and bank decisions has been totally cut to the detriment of depositors.