Why has Westpac raised interest rates?

Ross Greenwood speaks to Westpac’s (ASX:WBC) CEO Brian Hartzer after the bank raises interest rates on all variable home loans due to rising wholesale funding costs

Introduction: Why has Westpac raised interest rates?

Ross Greenwood:  Great to have your company here on Money News right around the country. As we told you at the top of the program, Westpac today indicated that it will increase its variable interest rates for owner-occupier and residential investment property loans. This takes the standard variable rate for owner-occupiers to 5.38%. It works out on a $500,000 loan to just a little under $50 a month or just under $600 a year. Raises all sorts of questions. Do note that the former treasurer, now the chairman of the Future Fund, Peter Costello, was out talking about this. He must’ve had a bit of a feeling somewhat. Here’s what he said today.

Peter Costello: You got to remember the Australian banks borrow a lot of money off shore, particularly, in the US and US rates are rising. I think they will be looking to increase rates. Some of them have done that already and I think it’s important that the monetary policy in Australia is still principally mediated by the Reserve Bank of Australia, but given the international pressures, yes, I think they will be looking for out-of-cycle rate increases.

Ross Greenwood:  Well, he was right. It only took a matter of hours. Westpac raised their rates. The Chief Executive, Brian Hartzer, is on the line. Many thanks for your time, Brian.

Interview with: Brian Hartzer, CEO, Westpac

Brian Hartzer: Evening, Ross.

Ross Greenwood:  Has the former treasurer, Peter Costello, got it pretty right there that it’s overseas funding pressures that are really causing these rate rises?

Brian Hartzer: Well, yes and no. This funding cost increase has been going for about six months now. That’s no secret. The particular issue that we’ve had has been in the domestic wholesale borrowing market which is the 90-day bank bill swap rate, but Mr. Costello is absolutely right in that that rate has very much been influenced by things going on offshore. Essentially, what happened is, as interest rates have risen in other markets, that has meant two things. One is that some of the people who were funding our domestic bond holdings have taken their money overseas looking for higher rates.

The other thing that’s happened is foreign borrowers who previously would borrow in offshore markets and then send their money down to Australia are now finding it cheaper to borrow in the domestic market. Essentially, you have more local demand and less local supply and that has meant that the bank bill swap rate has risen by about a quarter of a percent over the last six months.

Ross Greenwood:  Okay, it’s also out of cycle from the Reserve Bank. Does this mean that the reserve bank no longer runs monetary policy in Australia, that the big banks ultimately deciding the speed of the economy by the price of money?

Brian Hartzer: Well, the reserve bank plays a really important role but we’ve made it clear for a while now that banks don’t borrow at the cash rate. The cash rate is a short-term risk-free rate. It’s an input to interest rates but it’s not the rate at which we borrow money. It is an influence. Now, all things being equal, if the wholesale borrowing costs above, the cash rates stays stable, then a move by the RBA would change the borrowing costs. In this case, we’ve had an increase in those borrowing costs over six months without an RBA cash rate increase.

Ross Greenwood:  Are you, as the boss of a large Australian bank with a big mortgage portfolio, worried about what the impact of higher interest rates will do to property prices especially Melbourne and Sydney, which are already falling. Will this not necessarily just increase the trajectory of the fall of those housing markets?

Brian Hartzer: Well, anything that increases the cost of living for homeowners is obviously a challenge. However, in this case, I think it’s important to bear in mind that interest rates have come down significantly over the last few years. For example, even after this rate increase for us, our customers are paying 10 basis points less for an equivalent mortgage than they were three years ago. Our customers and borrowers, I think, across the country are actually in good shape. We think that the fundamentals of the housing market remain sound albeit we’ve seen a reduction in investment property demand and that’s probably contributing to the fall in prices that we’ve seen.

Ross Greenwood:  I’ve already seen it written previously but also even more recently that many of the banks had held off raising interest rates because of reputational issues that are coming out of the royal commission into misconduct in banking superannuation and financial services industry. Is it one of these decisions that you make thinking about your reputation? Thinking about what’s coming out of that Royal Commission?

Brian Hartzer: Well, Ross, a decision to increase interest rates is always difficult and it’s never something that we relish. In this case, we’ve been watching the wholesales funding cost for six months. We see it as part of our job to absorb the normal volatility that goes on. You get swings and roundabouts in rates and we generally wear that as we have in this case, but when we come to a conclusion after six months that these rates are going to sustain at these levels, in the end, I have to run the company for the long term. That means occasionally making difficult decisions when we feel that our funding cost has indeed changed.

Ross Greenwood:  The Royal Commission and all of the revelations coming out of that do damage banks’ reputations, do they have any influence in decisions on where the money is priced, where the interest rates are set?

Brian Hartzer: It’s obviously a difficult time for banks generally but no, this isn’t about the Royal Commission.

Ross Greenwood:  Okay, then go back to property prices, if this does make it more difficult for families and therefore, for the housing markets and you’ve got difficulties in those investment lending areas right now, surely, if that makes it tougher, your  debts could start to increase as a result of higher interest rates which could have a dilatory effect on your earnings. Surely, again, this is something that you need weigh up.

Brian Hartzer: Well, we obviously consider those factors but I think the fundamentals remain that Australian householders are actually in good shape. Two-thirds of our borrowers are ahead on their repayments. The interest rates are still near all-time lows and it’s important to remember that when we approve a home loan, we build in a very substantial interest rate buffer. In our case, about two and a half percentage points. That is what we assume the rates could go to before we approve a loan. Our borrowers already have a substantial buffer in their cash flow to be able to cover an increase like this.

Ross Greenwood:  Brian Hartzer is the Chief Executive of Westpac. Raised interest rates today by 14 basis points, 0.14% if you like and Brian, I appreciate your time in the program this evening.

Brian Hartzer: Ross, it’s always good to talk to you and thanks for listening.

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