Have the banks’ rate increases peaked?

From Banking Day today:

Westpac’s chief executive, Gail Kelly, said yesterday that she intends to make out-of-cycle interest rate cuts when lower funding costs permit, which she hopes will be in 2013 or 2014.

Speaking on the ABC’s 7.30 program, Kelly said she expected the bank’s average cost of funds to plateau towards the end of 2012.

“And then into 2013 and 2014 the amounts of money we raised at the height of the crisis, in 2009 and 2010, start to mature,” she said.

“Hopefully, we will be able to replace that at a much cheaper level. There is no question we will be passing benefit on to customers (in the form of interest rate cuts) when that happens.”

Kelly conceded that Westpac had not done a good job of explaining its decision to raise home loan rates by 20 basis points more than the increase in the official cash rate in December 2009.

“We did not handle communications nearly well enough. I should have been out there to explain it. It is absolutely explainable. I did not do a good enough job personally of getting out there to explain the factors, to explain that we had stood up to be counted during the crisis, that we had been prepared to lend the funds and that meant we were raising them at much more expensive levels.

“We always knew it was going to be unpopular. But, at the end of the day, you need to balance these things. We are running a business for the long run. It is really important to be a sustainable business.”

She said the bank’s view was that interest rates would rise only once this year – by 25 basis points in the September quarter, taking the official cash rate to five per cent.

During last year’s banking furor, various business boggins, Gotti and Albrechtsen among them, castigated the bank’s CEO’s for failing to come out in public and make the case for their unilateral interest rate rises.

One wonders then, why Gail Kelly is appearing on the ABC’s 7.30.

Either Westpac is softening us up for rate rises or they’re getting out in front to claim the fresh territory of plateaued rates.

If they’re smart, Ms Kelly’s appearance suggests the latter.

I am reminded of a debate that surrounded the US Bush administration after its disastrous invasion of Iraq when various officials claimed that the anti-American backlash was a result of poor communications. An image problem, as it were.

George Bush didn’t have an image problem. He had a real problem – himself and the decisions he took.

Similarly, if Westpac plans to raise rates again, they don’t have an image problem, they have real problem. And appearing to argue the case for later rate cuts is risking Gail Kelly getting hoisted on her own petard.

David Llewellyn-Smith
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  1. This sounds like a load of bull to me: everyone knows that the cost of funding to replace the super-cheap (almost free) funding the banks got post-GFC will be significantly higher.

    Even without a few PIIGS crises along the way, and without any major bank/rating agency questioning the continued validity of the Aussie housing bubble (and hence upping the risk premium), short of the RBA dropping the cash rate in an emergency, cost of funding is not likely to go down in the near term.

    This sounds like a “come and get a mortgage – we might, maybe, two-thirds, could, depends – drop your interest rate by 10-30 basis points, in the possible undeterminable future, perhaps.” PR dig to desperately grow their shrinking mortgage book…

    • Sam Birmingham

      Smart move by Kelly, I would have thought. Sure, if might be a load of bull, but she has put a 2-3 year time horizon on any such changes and, let’s be honest, the average punter nowadays has the attention span of a goldfish – when 2013/14 ticks around, no one will be there to hold her to account.

      Moreover, even though she knows of the likely threats to her “promise”, Kelly can hardly spook her customers by talking about the threat of further crises / increasingly expensive cost of money / etc.

      As The Prince says:
      “This sounds like a “come and get a mortgage – we might, maybe, two-thirds, could, depends – drop your interest rate by 10-30 basis points, in the possible undeterminable future, perhaps.” PR dig to desperately grow their shrinking mortgage book…”

    • Totally agree Prince!

      HOPEFULLY funding costs decline..Sure we will pass on interest rate cuts….And what do they say about banker promising you something!

      Underlying decline in credit growth is driving these guys crazy who have got soo accustomed to infinite rent seeking, banking on house price appreciatinon. They have to compete in the market place for a change and not just take growth for granted!

      Funny how no mention of business credit pricing in at all! The Australian Dream of home ownership is the beauty contest that none of the banks is willing to compromise on.

      Wait till the UNEXPECTED delinquincies rise, capital gets slaughtered and all of a sudden the invisible hand of Govt. will be forced to bring out its magic wand! Will it work again?? The odds are not favourable!

  2. peaked? wouldn’t have thought so…..post-APRA announcements I’m sure they be looking for the opportunity to slip another one in…..if only the RBA would help them out….