Westpac lifts longer-term mortgage and term deposit rates by whopping 30 basis points

Westpac is hiking its two- to five-year fixed mortgage rates by a hefty 30 basis points due to the way the market has responded to the Reserve Bank cutting the Official Cash Rate a fortnight ago.

The tone the Reserve Bank struck in its commentary gave the market the impression it was closing the door to the possibility of the Official Cash Rate (OCR) being cut again.

This caused swap rates, which influence mortgage rates, to spike and remain elevated.

Two-year swap rates are about 40 basis points (bps) above where they were before the Reserve Bank cut the OCR by 25bps on November 26.

Some observers have over the past fortnight been saying it is only a matter of time before the first bank buckles to the pressure of rising funding costs and lifts its fixed mortgage rates.

Indeed, Westpac said wholesale rate rises were behind its decision to lift its two-, three-, four- and five-year fixed mortgage rates by 30bps.

To offset this a little, it said it would cut its six-month advertised special rate by 20bps – the lowest of the five biggest banks.

The OCR tends to affect banks’ shorter-term rates, while wholesale markets influence their longer-term rates.

Westpac is also lifting its two- to five-year term deposit and PIE fund rates by 30bps and its 12- and 18-month rates by 10bps.

The new Reserve Bank Governor Dr Anna Breman will have an opportunity to try to talk the market down – should she wish to do so – when she speaks to media over a breakfast on Wednesday morning.

Her predecessor, Christian Hawkesby, declined this opportunity when the Herald interviewed him to on November 27.

Asked what he made of swap rates rising, Hawkesby said, “I think we had an awareness of what the market reaction might be to our decision ... We always have our markets team brief us on the likely reactions to different decisions we make. So it sort of fell in the ballpark of what we expected.”

Swap rates rose even more thereafter.

Some commentators accuse the Reserve Bank of bungling its communications.

They are of the view that mortgage rates need to remain low to stimulate the sluggish economy. They fear rate rises could stymie the economic recovery.

JB Drax Honore chief strategist for Asia Pacific, Sean Keane, said the signal the Reserve Bank sent the market that the easing cycle was over was “premature and unnecessary”.

“The banks are simply going to pass on the higher costs that they pay in the market,” he said.

Westpac’s rate changes will take effect on Wednesday.

The Reserve Bank is next due to review the OCR on February 18.

Jenée Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.

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