RBA Says Mortgage Rates Taken Into Account in Policy

March 30 (Bloomberg) -- Australia’s central bank said its policy actions took into account that home-loan rates have risen more than its benchmark interest rate, suggesting fewer increases are needed to return borrowing costs to normal levels.

“While interest rates on mortgages have increased relative to the cash rate, the Reserve Bank is able to take account of those changes in its policy deliberations,” Assistant Governor Guy Debelle said in Sydney today. “The cash rate determined by the Reserve Bank is still the major determinant of the interest rate structure in Australia, including that of mortgage rates.”

Commercial lenders have raised mortgage rates by more than the central bank’s increases in its benchmark since October, prompting criticism from Prime Minister Kevin Rudd’s government. Governor Glenn Stevens said before this month’s boost in the policy rate to 4 percent from 3.75 percent that borrowing costs are about 50 to 100 basis points below normal.

“A rate hike next week is looking increasingly like a done deal,” said Mitul Kotecha, Hong Kong-based head of global foreign-exchange strategy at Calyon, the investment banking unit of France’s Credit Agricole SA.

Traders are betting there is a 56 percent chance of a quarter-point rate increase when the central bank next meets on April 6, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 10:18 a.m.

The Australian dollar traded at 91.67 U.S. cents as of 10:54 a.m. in Sydney from 91.69 cents before Debelle’s speech.

Funding Costs

Debelle said the “competitive state” of Australia’s mortgage market “is reflected in the fact that home lending rates have not risen as much as funding costs.”

Relative to the cash rate, the average rate on variable- rate housing loans has increased by around 110 basis points since the middle of 2007, he told the Mortgage Innovation Conference. That is below the estimated 130 to 140 basis point rise in banks’ overall funding costs over the same period.

Debelle, who heads the central bank’s financial markets division, also said the securitization market is starting to recover, and the cost of long-term and short-term wholesale funding has decreased since the middle of 2009.

“Already, the improvement in securitization has encouraged some of the smaller lenders back into the market and encouraged some brokers to again look to increase their own mortgage lending,” he said, adding that the “housing loan market remains contestable.”

Historical Average

Mortgage rates in Australia are currently around 50 basis points below their historical average after this month’s increase in the Reserve Bank’s policy rate, the fourth move in five meetings, central bank official Philip Lowe said last week.

Australia’s policy makers, the first among Group of 20 nations to raise borrowing costs this year, are acting on the basis of the central bank’s so-called “central scenario,” which sees countries in Asia growing “reasonably solidly,” as advanced economies experience “only a subdued recovery,” said Lowe, who is also an assistant governor.

Treasurer Wayne Swan in December said commercial lenders “can expect a very severe backlash” after Westpac Banking Corp. raised its mortgage rate almost twice as much as the Reserve Bank’s increase that month.

“Westpac and any other bank that follows Westpac’s lead can expect a very severe backlash from their customers and from the community generally,” Swan told reporters on Dec. 1.

Westpac, which stayed profitable throughout the worldwide slowdown, said at the time that it was raising home-loan costs at a faster pace than the central bank due to higher wholesale funding costs.

Australia’s four major banks all raised variable home-loan rates by 25 basis points earlier this month, matching the central bank’s March 2 increase in its key policy rate.