Everybody is "furious" and ‘upset" at the "selfish" Commonwealth Bank for putting its variable housing rate up 0.10% on Friday (which applies from today).
You name a politician, from Government to Opposition, to talkback host and most populist commentators the ‘rate rise’ by the CBA was just too much.
Julia Gillard was "furious" on behalf of the Government yesterday; Wayne Swan on Friday said the CBA was "selfish". Julian McGuran, an Opposition senator, said the banks should lose the Federal Government guarantee.
And yet all this confected rage has missed the point. Far from being ‘selfish’ the CBA is actually a chicken.
It has finally blinked and changed its rate after having the lowest home loan rates for three months or so.
It still says it has the lowest home rate, but its no longer as noticeable.
Its variable rates were just over 0.10% lower than those on offer from the competition, a situation that had existed since April.
Rather than leave them there and cut costs (or rake a crimped interest margin) and advertise that this to the world (every little bit helps), the bank’s managers have lost their nerve and lifted the rates to bring them into rough parity with its peers, Westpac, the ANZ and NAB.
So much for price competition.
The lower rate came from the bank’s cut after the April rate cut of 0.25% by the RBA (which brought the cash rate back to 3%). It could have left the small discount there and used it cleverly.
But its clear that the CBA management sees safety in the pack with its ‘competitors’ who with the CBA, control around 92% of all home lending at the moment.
The CBA has been writing plenty of home loans, especially for first home borrowers and has introduced a tightening in the rules for qualifying for loans, which all banks have.
These have included at least three months of genuine savings and the home buyer grants can’t be considered to be savings. This has been done to slow the demand for these products.
The out of proportion reaction to this ‘rate rise’ will probably promote a stampede of new home buyers (especially first home building borrowers) with the suggestion that rates are going to rise further.
Weekend suggestions that rates have stopped falling and the next move is up will add to that.
But that’s as accurate as the CBA’s move was altruistic.
Interest rates have moved up as the panic about the financial system has eased and investors and depositors have rediscovered risk.
Apart from home lending, no other form of lending is growing in the Australian economy at the moment.
In fact lending to business and personal finance lending for leases, margin loans are all falling or static, while credit card purchases are running well down on a year ago.
The fall in business lending means there’s no ‘crowding out’ as the Federal Opposition suggests. Business is refinancing itself through the sharemarket, not through the banks.
When that happens, there can be no crowding out whatsoever.
According to the RBA’s credit figures for April; home lending is now the strongest area of activity for the banks.
It’s the only growth option at the moment (as it is for the entire economy for the next year or so).
The CBA’s move has merely restored the status quo in what passes for the competitive Australian banking market.
The Reserve Bank won’t be happy because it would like to cut rates later in the year as inflation falls.
It is already on the record as expressing that as clearly as it could in its post meeting statement earlier this month.
The minutes of that meeting will; hopefully elaborate on those comments when released tomorrow.
But the CBA move has raised the thought that further cuts in the cash rate won’t get passed on to home lenders, simply because the banks have now passed on virtually nothing of the April cut of 0.25%.
The reasons are in the CBA’s announcement Friday:
"The Commonwealth Bank today announced that although its standard variable home loan interest rate will increase by 0.10 per cent per annum, its rate is still the lowest of the major banks.
"Ross McEwan, Group Executive Retail Banking Services said, "This is a decision the Bank has made reluctantly.
“During most of the past 18 months, Commonwealth Bank customers have had the benefit of the lowest standard variable home loan rate on offer from the major banks.
“However, given our increasing funding costs, it has become necessary to make this increase."
"On a typical $300,000, 25 year loan, the required monthly repayment will increase by $18 per month.
“However, over 90 per cent of our customers will have no increase in their repayment as they are currently paying in excess of their required minimum repayment."
"We fully understand that any increase in interest rates impacts on our customers and for that reason, have continued to absorb as much of the additional funding costs as long as we could.
“Unfortunately, we have seen the Bank’s wholesale funding costs remain high and continue to increase as previous long term funding matures and is replaced with new funding at significantly higher cost.
“At the same time, due to intense competition for retail deposits, the cost of deposits compared to the official cash rate is extremely high," Mr McEwan added.
"The Bank will be increasing a range of Home Loan Fixed Interest rates, reflecting the recent rise in wholesale market interest rates and will also be increasing its Residentially Se
