Commonwealth Abandons Low-rate Gambit

Sydney Morning Herald

Thursday February 7, 2008

Jacob Saulwick

THE Commonwealth Bank, the nation's biggest mortgage lender, dealt a double blow to borrowers by adding its own sting to the Reserve Bank's interest rate rise.

The Commonwealth said yesterday it would raise mortgage rates by 0.3 percentage points tomorrow, which puts a 0.05 percentage point premium on Tuesday's official rate rise.

None of the other major banks ruled out following the Commonwealth's move.

The federal Treasurer, Wayne Swan, who this week will meet key economic regulators to nut out plans to help borrowers switch lenders, said families would rightly be furious with the Commonwealth's decision. The bank had tried to attract customers by implementing the lowest increases of any of the major banks when they started raising rates independently last month.

The Commonwealth's variable interest rate will rise to 8.97 per cent. It has now pushed rates 0.15 percentage points higher than the official setting. This is higher than NAB's 0.12 percentage point increase, equal to Westpac's, and less than the 0.2 percentage points imposed by ANZ and St George.

The banks have been increasing rates because they have to pay more to borrow money, a result of the financial crisis in the United States.

Ross McEwan, the Commonwealth's group executive for retail banking services, said the bank had believed its funding costs would ease in January.

"Regrettably this has not happened," he said. "Given the continuing volatility in global markets, we are now of the view that rates in the wholesale funding market will remain high for a prolonged period."

Mr Swan said the Commonwealth had a lot of explaining to do. "I've got a lot of sympathy for families who, I think, will be really furious today at the Commonwealth Bank for the timing of this announcement - taking the opportunity to further increase rates on the back of the Reserve Bank decision," the Treasurer said.

Meanwhile, an NAB survey showed consumers kept spending towards the end of last year, which would fuel the Reserve's concerns about inflation.

© 2008 Sydney Morning Herald

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