Banks raise interest rates independently of the Reserve Bank

 All of the ‘Big 4’ have now raised interest rates independently of the Reserve Bank of Australia, citing increases to the amount of capital that they are required to hold to support their lending books. Rates on a standard home loan have gone up by 0.17% – 0.20%.

The Australian Prudential Regulation Authority, APRA, oversees banks, building societies and credit unions, as well as insurance companies and retail superannuation funds. In the last 12 months, APRA has introduced a 10% growth cap on loans for investment properties as well as other measures designed to improve the strength of the banking system. The Big 4 have all raised billions of additional capital via equity raisings to meet these new requirements, money which cannot be lent out but must stay on the balance sheet in case there is another financial crisis in the future. This has put pressure on profit growth and in turn has raised questions about the growth in bank dividends. More shares on issue means profits need to increase otherwise everyone will get fewer cents per share in dividends.

Attention will now turn to the Reserve Bank who will once again take some of the spotlight away from the Melbourne Cup and deliberate on interest rate policy. On the one hand they are concerned about low economic growth rates and levels of unemployment, versus the elevated property prices in Sydney and Melbourne. Even if the RBA reduced rates, there is no guarantee that banks would pass the cut onto consumers. The APRA initiated changes give the banks a perfect excuse to hold onto any changes.

For mortgage holders it is never pleasant to see that interest rates are going up, however investors are happy to see steps being taken to keep profits and dividends growing. Spare a thought for the retirees with money on term deposit – It’s very unlikely that they will see any increase to their meagre returns as a result of these recent changes.