John Collett  | The Sydney Morning Herald |October 20, 2010
http://www.smh.com.au/money/super-and-funds/the-rategoround-20101019-16rzd.html

The big banks are laying the ground work to lift their mortgage interest rates by more than the rise in the official cash rate. Itching to lift their home loan rates, they have been softening up the business press about the need to protect their margins as their costs of raising money has increased since the onset of the GFC.

Last week, Westpac boss Gail Kelly and Commonwealth Bank's Ralph Norris signalled their intentions. Perhaps doing this through the media will reduce the chance of a repeat of last time around when Westpac went alone. Safety in numbers.

When the Reserve Bank lifted the cash rate 25 basis points in December, Westpac raised its standard variable rate by 45 points with ANZ following with 35 points and CBA with 37 points. For Westpac, it was a public relations disaster. The bank was pilloried by the government and its home loan customers were outraged. In the previous round of out-of-cycle rate changes, CBA increased its standard variable rate by 10 points in June 2009, when the Reserve Bank left the cash rate unchanged. The other banks did not follow. Before that, NAB left its rate unchanged when the RBA cut the cash rate by 25 points in April 2009.

As the analysis in The Australian Financial Review shows, in the past three years, there have been out-of-cycle changes by at least one of the big banks on 13 occasions. Of those, NAB and CBA were the first to move - four times each. Westpac made the first move three times and it's been ANZ's turn twice. By rights, it should be ANZ's turn to take the flak from the government and the media but, of course, whether ANZ takes the lead also will depend on whether ANZ wants to grow its mortgage book relative to the other big three banks.

When next the Reserve Bank increases the cash rate don't be surprised to see the banks lift their rates at the same time by more than the cash rate.

A healthy banking sector has helped to protect Australia during the GFC - no argument there. The argument about the level of profits and the extent of those profits suggests competition is not working. Who says these increased costs, or most of them, must be passed on to borrowers? If the cost of coffee rises by 20 per cent, does that mean that my local coffee shop increases the cost of a cup of coffee by 20 per cent?

It depends. If there are plenty of competing coffee shops close by, or if everyone decides to forgo their daily caffeine hit, probably not.

The point is that the big four have captured the mortgage market and borrowers legally must keep making repayments. The banks account for more than 80 per cent of all new home loans. Fortunately, some small players are around with competitive interest rates from time to time. It's up to consumers to ask their lender for a discount on their mortgage interest rate, or shop around for a better deal.