Westpac's rates rise piles pressure on Australia's central bank

[SYDNEY] Australian banking giant Westpac said on Wednesday it was raising A$3.5 billion (S$3.52 billion) in capital and lifting home loan interest rates, in a move likely to increase pressure on the central bank to loosen monetary policy.

Westpac, the nation's second-largest mortgage lender, said the decisions were in response to tougher regulations requiring banks to hold more capital reserves as a buffer against mortgages after the global financial crisis.

"This is a difficult decision and one that is not taken lightly," Westpac's head of consumer banking George Frazis said in a statement.

"We acknowledge that it does impact customers, even in an environment where interest rates remain near historic lows." Analysts said Westpac's announcement to hike home loan rates by 20 basis points per annum could be followed by Australia's other major lenders - Commonwealth Bank, National Australia Bank and ANZ.

At the same time, the bank's move lifted market expectations that the Reserve Bank of Australia might have to slash the cash rate from a record-low of two per cent to 1.75 per cent as soon as next month.

Interest rates are at a record-low as the RBA has sought to boost consumer spending and non-mining sectors of the economy while an unprecedented resources investment boom fades.

"With growth stuck around two percent and the mining investment downturn only about half-way through, the last thing the economy needs now is a rate hike for the 30-40 per cent of households who have a mortgage given the threat it will pose to consumer spending," AMP Capital chief economist Shane Oliver said.

"The best way to avoid this is for the RBA to cut the official cash rate in order to offset the higher funding costs the banks now face." But other economists said further central bank easing was not guaranteed, given it was unclear if banks would pass on any of the cuts to their customers.

Westpac is the last of the big four banks to raise capital over the past few months, with its announcement taking the total amount close to A$20 billion.

The financial institution, which is in a trading halt until October 19, added that it recorded a six per cent rise in unaudited preliminary net profit of A$8.01 billion in the 12 months to September 30 compared to the previous corresponding year.

Cash earnings, the measure more closely watched by analysts and which strips out volatile items, was an unaudited A$7.8 billion, a three percent increase from last year.

"Overall, a solid (net interest margin) outcome which has helped to deliver a largely in-line result," investment analyst Omkar Joshi of Watermark Funds Management said in a note.

AFP