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Why Are Banks Increasing Interest Rates?

Posted on October 1, 2018
by Phil Grant in Accounting Blogs & BUSINESS Blogs

As a person with a mortgage, I keep a keen eye on interest rates to see if my monthly mortgage repayments are going to go up.

The Reserve Bank has their monthly meeting on the first Tuesday of each month, and as a mortgage holder, I’m always hoping they either drop interest rates or at least keep them the same.

Up until a couple of years ago, the banks generally followed the Reserve Bank quite closely, and so if the Reserve Bank cut the cash rate, then the banks would follow suit.

If the Reserve Bank raised the cash rate, then the banks would be quite quick to increase their rates as well.

Recently the banks haven’t been following the lead of the Reserve Bank. Just this week the Reserve Bank announced they were keeping the cash rate steady, however the day after both the ANZ and CBA announced increases in their variable home loan rates (following the recent lead of Westpac) by 16 basis points (0.16%) per annum and 15 basis points (0.15%) per annum accordingly.

So why the change in the banks policies of closely aligning their interest rate movements to that of the Reserve Bank?

The simple answer is because they can, because it suits their own needs.

Banks are large corporations designed to make money, and they do that very well. Everybody is aware that the Big 4 banks make billions of dollars every year.

The banks’ reason for lifting their rates is due to the increasing funding costs, which they are then passing on to their customers. Is this reason true? Maybe? Do they have to pass this increase on to their customers? No.

So why do they increase their rates when they already make billions of dollars? Because they want to continue to make billions of dollars!

Interestingly the ANZ and CBA both announced their decision on the same day. So why would they do this? The cynic in me would say that if they announce bad news to the public at the same time, then they can share the public backlash rather than cop it by themselves.

Public image is important to banks as it can affect their bottom line. Their bottom line is already very good, and banks want to protect their bottom line.

General opinion is that the Reserve Bank will keep rates on hold next month. Let’s wait and see what happens with the banks.

 

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