Home housing mortgage

Westpac has become the first of the big four banks to raise interest rates, staging a 14-basis point rise, amid a record period of inertia by the Reserve Bank of Australia.

The rate hike follows a prediction by Morningstar banking analyst David Ellis, who last month suggested Westpac (ASX: WBC), Australia’s largest mortgage lender, would be the first of the big four banks to move.

Ellis suggests Commonwealth Bank (ASX: CBA) is also under intense pressure to lift rates, regardless of the likely public backlash, if short-term money market rates stay at their elevated levels.

Even as higher capital funding costs put lenders under increasing pressure to increase rates, political pressure mounted too as damning findings from the royal commission into banking hurt customer and investor sentiment.

Westpac will raise variable home loan rates by 14 basis points, effective from September 19, citing an increase in its wholesale funding costs.

Westpac's annual variable mortgage rate for owner-occupier properties will increase to 5.38 per cent for customers with principal and interest repayments.

This rate will increase to 5.93 per cent for residential investment property loans.

The RBA has kept the official cash rate at a record-low of 1.5 per cent, citing tepid inflation.

Some Australian lenders including Macquarie Bank, Bendigo & Adelaide Bank and AMP Bank have raised mortgage rates this year.

Future Fund chairman Peter Costello yesterday alluded to the pressures spurring banks toward out-of-cycle rate rises.

"Australian banks borrow a lot of money offshore and in particular in the US, and US rates are rising, so I think they’ll be looking to increase rates,” Costello, former treasurer, said yesterday.

"It’s important that monetary policy in Australia is still principally mediated by the Reserve Bank of Australia, but given the international pressures, yes, I think they’ll be looking at out-of-cycle rate increases."

Westpac's share price was up 2.8 per cent to $28.90 on early news of the announcement, from yesterday's opening price of $28.11. Ellis puts the bank's fair value estimate at $35.

Shares in other major banks also moved higher, taking the S&P/ASX 200 financials index up 1.5 per cent in Wednesday's afternoon trading.


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Glenn Freeman is senior editor, Morningstar Australia

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