Red Faces As Nab Raises Home Rates

Sydney Morning Herald

Wednesday March 26, 2008

Danny John

NATIONAL Australia Bank has been forced into yet another embarrassing round of top-up interest rate rises - the second in less than three months - as the global credit crunch continues to squeeze the ability of institutions to fund new mortgages.

Having sought to gain an advantage over its rivals by raising the cost of its standard variable rate mortgages by the lowest amount of the top five banks earlier this month, NAB yesterday admitted defeat and added another 9 basis points - 0.09 per cent - to its main home loan product.

The increase took the bank's key rate to 9.36 per cent, wiping out the competitive edge it had sought to benefit from when the Reserve Bank pushed up official cash rates by 0.25 per cent on March 4.

NAB was the first of the majors to move when it lifted its standard variable mortgage by 0.29 per cent - 4 basis points higher than the RBA - to try to compensate for the higher borrowing costs all financial institutions are paying to borrow money from volatile international credit markets.

But market watchers questioned its ability and that of the other lowest mover - Westpac, which lifted its loans by 30 basis points - to be able to hold their rates at that level in light of the squeeze being applied to their margins.

Subsequent increases by Commonwealth Bank, ANZ and St George saw them push through rate rises by as much as 35 basis points - 10 points higher than the RBA and 6 points more than NAB.

That left variable home loan costs in a range between 9.27 per cent - NAB and Westpac - and 9.37 per cent, which is where ANZ and St George ended up after their increases.

The Commonwealth, which like NAB pitched low in January in the first round of rate rises outside of the RBA cycle, was left in the middle at 9.32 per cent after going 35 basis points higher in the most recent round of interest rate rises.

Both Commonwealth and NAB subsequently pushed through additional increases in February, which brought them almost into line with their rivals as their gamble that the liquidity crisis would ease failed.

NAB's latest rise, which will apply from today, comes as a setback for its chief executive, John Stewart, who last month told home owners the bank would seek to avoid passing on extra rate increases.

Ahmed Fahour, the head of the bank's Australian operations, said the RBA's rate no longer reflected the real cost of funding mortgages. "Current wholesale funding costs are highly volatile and remain well above normal," he said.

"Bank wholesale funding costs have risen above Reserve Bank increases, and the spread between the Australian 90-day bank bill rate and the cash rate has been substantially higher than the usual spread.

"We have continued to issue in offshore markets for term funding at these substantially higher spreads, which leads to higher borrowing costs for businesses and mortgage loan customers."