The Bank of Queensland (BoQ) increased its home loan interest rate by 10 basis points despite the Tuesday decision by the Reserve Bank of Australia (RBA) to hold the overnight cash rate at 4.25 per cent.
With the hike, which takes effect on March 16, BoQ's interest rate would go up to 7.46 per cent from 7.36 per cent. BoQ Chief Executive Stuart Grimshaw pointed to rising cost as the reason behind the small lender's decision. BoQ's rate is the same as Westpac Bank which has the highest rate among the big four.
Other banks such as the big four are expected to make similar moves in the coming days. In the February RBA rate decision, it was not just the big four but 45 financial institutions that ignored the RBA decision and raised their rates.
Mortgage Choice, the largest independently operated mortgage broker in Australia, warned buyers and borrowers to prepare for future rate movements or unexpected changes to their financial situation, and urged them to factor in a repayment buffer of at least 1 to 2 percentage points.
The company echoed government advice for borrowers to shop around for lower rates since moving to a lender with lower rates could translate into potential savings averaging $10,000 spread over five years.
The RBA decision did not surprise the banking community since analysts predicted correctly that the Australian central bank would keep the cash rate. Despite the disappointment in the housing industry and among businesses over the RBA decision since they were expecting a rate cut, Treasurer Wayne Swan defended the RBA move.
He said the current cash rate is still 250 basis points lower than when the Liberals left office. He said the RBA has the flexibility to respond if the global situation further worsens.
"Part of the reason for this is that the government is delivering a responsible fiscal strategy, ensuring that we're not adding to price pressures in the economy," Mr Swan said.
Housing Industry Association chief economist Harley Dale insisted that based on the "fractured state of economic conditions in Australia" small and medium-sized enterprises, and even some large businesses, feel considerable pain which should have led to a rate cut instead.
However, RBA Governor Glenn Stevens insisted it was the right decision at the moment because recent data said the deep downturn expected is not happening. He cited continuous moderate expansion in the U.S. economy despite weak outcomes in several European nations, and the moderated growth in China which still pointed to robust overall growth.
"With growth expected to be close to trend and inflation close to target, the Board judged that the setting of monetary policy remained appropriate for the moment.... Should demand conditions weaken materially, the inflation outlook would provide scope for easier monetary policy," he said in a statement.
In anticipation of criticisms that banks are ignoring RBA policy, RBA Deputy Governor Philip Lowe said in an economic forum on Wednesday in Sydney that they key question on lenders moving independently of RBA decisions is whether it undermines the transmission mechanism of monetary policy.
Mr Lowe said it does not, although he acknowledged that it throws sand in the wheels of the transmission mechanism. He pointed out that there are other factors that influence banks' lending rates.
He also rejected calls for the RBA to intervene in the currency rate. Mr Lowe said the strong employment figure, forecasts of growth and inflation rate within the RBA's target of 2-3 per cent are reasons why the argument for the central bank to weaken the Australian dollar would not hold. He added the RBA will only intervene when there is clear indication that the currency is overvalued.
"At the moment, the high currency is being driven by the high terms of trade and the higher terms of trade are being driven by these global developments so I don't think we can make the case that the currency is fundamentally away from where the right level is," The Australian quoted Mr Lowe.
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