WESTPAC is believed to be planning a softer approach to mortgage pricing if, as expected, the Reserve Bank decides to lift interest rates when it meets tomorrow.
Several meetings of the Westpac's pricing committee ahead of the RBA decision is understood to have already opted for a "middle of the road" approach to pricing interest rates across the board, even though the bank continues to be squeezed by funding costs.
Treasurer Wayne Swan put banks on notice earlier today, warning they are likely to face a further backlash if interest rates rises exceed any move by the Reserve Bank.
While Mr Swan would not comment on the future direction of offical interest rates, he said last month's additional mortgage rate rises by three of the big banks were "totally unjustified".
"The community backlash against those banks has been substantial, and I certainly hope they heed the warning," Mr Swan told ABC radio this morning.
Stung by intense political and customer criticism following the bank's super-sized interest rate rise on mortgages in December, Westpac is taking steps to shed its pricey image. This is likely to result in an interest rate rise that either matches or comes in at just a few basis points above any move by the Reserve Bank.
Rival National Australia Bank has already put intense pressure on its rivals with the bank's retail head, Lisa Gray, telling BusinessDay over the weekend that "NAB will not increase interest rates above any RBA decision".
NAB, which is looking to grow its mortgage book, was the only bank to move its interest rates in line with the central bank in December.
Economists widely expect the Reserve Bank to raise interest rates by 25 basis points to 4 per cent at its meeting on Tuesday. The move, its fourth rise in as many meetings, is aimed at keeping inflationary pressures in check.
Pricing on mortgages is set to become the first key decision for new Westpac senior executive Rob Coombe, who takes charge of the bank's flagship retail and small business banking division this morning.
Mr Coombe, a former head of Westpac's wealth management arm, BT Financial, replaces Peter Hanlon, who takes on the role of overseeing the bank's technology and human resources operations.
Westpac last month raised interest rates on mortgages by 45 basis points, nearly double the Reserve Bank's rise in official interest rates. The ANZ, Commonwealth and St George banks each increased interest rates across mortgages in excess of December's rise in official rates, but stopped short of Westpac's rate move.
Brian Johnson, a senior analyst with CLSA Asia Pacific Markets, said while Westpac would experience an earnings rise on its December interest rate decision, NAB would be starting to feel the squeeze on profits.
If NAB does limit its interest rate rise to just 25 basis points if official interest rates rise tomorrow, this is likely to give a further "earnings tailwind" to its rival banks.
"It's not good for shareholders," said Mr Johnson.
Westpac strongly defended its rate rise in December, saying the move went only some of the way to restoring margins that had been squeezed by rising funding costs.
While spot long-term funding costs have fallen since the peak of the global financial crisis, they remain well above pre-crisis levels.
