By Eric Johnston
Banks have warned funding costs are likely to remain elevated well into next year, raising the prospect that any future interest rate rises could outpace moves by the Reserve Bank.
The major banks and regional lenders today raised rates across their variable mortgages by 25 basis points, matching the central bank's quarter of a percentage point rate hike earlier this week.
Given significant government support for the sector over the past year in the form of deposit and funding guarantees, banks have been careful to keep politicians onside by keeping rate rises on mortgages in check.
But rates in less politically sensitive areas such as business loans and credit cards have been rising as banks have been seeking to protect profit margins.
But banks argue they face substantial funding headaches, particularly in offshore markets which are still being ravaged by the global financial crisis.
''We expect overall costs to increase into 2010, driven mainly by the rising average cost of term wholesale and retail deposit costs,'' a spokeswoman for National Australia Bank said.
Banks normally generate half their funding from deposits, with the balance split evenly between mostly offshore short-term and long-term funding.
While short-term funding costs have eased from their highs which were reach in the weeks following the collapse of Lehman Brothers, long-term wholesale funding costs remaining stubbornly high.
Indeed, average costs have increased in the past six months as governments and banks around the world compete in offshore markets for limited long-term funds.
Currently Australian banks are paying a premium of around 1 percentage point over the benchmark bond rate for term funding. Before the credit crisis, banks were paying a premium of just 0.2 percentage point over the benchmark bonds.
''Wholesale funding costs remain high and continue to increase as previous long term funding matures and is replaced with new funding at a significantly higher cost,'' said Commonwealth Bank's head of retail banking Ross McEwan.
High wholesale funding costs has also forced banks to rely more on domestic deposits, which has pushed up the cost of customer deposits for banks by between one and 1.2 percentage points over the past year.
The latest rate rise is likely to spark a further price war on deposits with some banks including ANZ hiking rates on high interest deposit accounts by 50 basis points.
In raising rates from near 50-year lows, the central bank citied a better-than-expected recovery of the Australian economy, a view underscored by today's surprise fall in the official jobless rate last month to 5.7 per cent. The central bank is eyeing a more ''normal'' setting for monetary policy, hoping to minimise the risk of any inflationary pressure.