WESTPAC'S decision to push through a bigger than expected 45-basis-point rise across its standard variable mortgage rate follows intense competition for deposits that is prompting banks to turn to home owners to claw back higher funding costs.
The bank's increase in its key mortgage rate by almost twice that of yesterday's official rate rise has paved the way for rival banks to follow suit.
While ANZ, Commonwealth Bank and National Australia Bank had not moved mortgage rates last night, they are expected to announce rises as early as today.
Westpac yesterday drew an immediate rebuke from Treasurer Wayne Swan, who said there was no justification for raising rates by more than the Reserve Bank's 25 basis points.
Westpac, which counts more than 10 million customers across brands such as St George and Bank SA, blamed higher wholesale funding costs for the decision.
Major banks have told investors in recent weeks that net interest margins - a key driver of profits - have stabilised or are moving higher.
Indeed, among the major banks Westpac has enjoyed the biggest recovery in lending margins, with its net interest margin on all lending rebounding by 31 basis points over the past year to 2.38 per cent, helped by the repricing of loans to big business.
Westpac recently unveiled an annual cash profit of $4.62 billion, a drop of 8 per cent over the year.
Chief executive Gail Kelly opened the door for a possible rate rise earlier this month, warning that average funding costs would continue to rise due to intense competition for deposits and term debt rolling over at a higher rate.
At an investor briefing, she said long-term debt had typically been issued at 15 basis points above benchmark rates before the financial crisis, whereas the premium was now more than 100 basis points. It had peaked at nearly 200 basis points at the height of the credit crisis.
Westpac's standard variable home lending rate now stands at 6.76 per cent, while the increase in business loan rates will be limited to 25 basis points. The interest rate changes for home and business loan rates are effective from Friday.
Banks say they face substantial wholesale funding headaches, particularly in offshore markets still ravaged by the global financial crisis. As well, the cost of short-term funds has crept back up in recent months on rising expectations of official Australian interest rates ratcheting higher.
However, given significant Government support for the sector over the past year in the form of deposit and funding guarantees, the banks have been careful until now to stay onside with politicians by keeping rate rises on mortgages in check.
Axiome Equities analyst Brett Le Mesurier said banks were attempting to reduce their reliance on global wholesale funding after markets froze during the credit crisis. In general, the cost of funding increases as maturity horizons lengthen.
For Westpac, longer-term funding now accounts for about 65 per cent of wholesale funding, up from around 30 per cent just two years ago.
