Adelaide Bank's 15-point Insult To Rba Injury

The Age

Thursday March 6, 2008

Leon Gettler, Financial Services Reporter

ADELAIDE Bank has become the first bank to lift its rates above this week's 25 basis-point increase by the Reserve Bank.

The bank, now under the Bendigo Bank umbrella, has increased the cost of wholesale funds it supplies to its 35 mortgage brokers and originators by 40 basis points, 15 points above the RBA's 25-point increase.

An Adelaide Bank spokesman said: "You would hate to predict what's going to happen but, clearly, many brokers will be expected to pass these on."

With that likely to happen, Adelaide Bank's rate increase will add $60 a month to the cost of servicing a $250,000 mortgage.

The spokesman said the bank was lifting rates in response to the higher costs banks now faced raising money in global capital markets. The RBA increase had already been factored into those increased costs.

"Clearly, it's in response to the increase in wholesale funds globally," the spokesman said.

"The market had already factored in the 25 basis-point rise, so all the wholesale funds had increased by that much."

And there is a chance Adelaide Bank may bring in another increase. Even with this latest rise, it is still struggling to cover its costs of raising money in global markets.

"We are recovering only partly our costs," the spokesman said.

He would not rule out another increase.

Adelaide Bank is likely to be joined by other banks over the next week.

They are reviewing their rates and are also expected to lift them by more than the RBA increase.

Last month, National Australia Bank raised its variable rate to 8.98%, 4 basis points more than the RBA's 25-point lift at the beginning of the month. Commonwealth Bank increased its rate by 30 basis points.

But analysts say those increases were insufficient to cover the bank's rising costs, so they now expect bigger increases.

Adelaide Bank's decision reflects the problems banks face acquiring raw material in global capital markets. With the credit squeeze, imported money is becoming more expensive by the day.

With tighter markets and credit risk, not only have the interest rates that businesses pay for short-term loans increased steeply but the banks themselves now have to pay a premium on top of that rate just to do business.

KEY POINTS

? Adelaide raises its rates by 15 basis points more than the RBA rise.

? That increase will add $60 a month to the cost of servicing a $250,000 mortgage