Interpac Business and Migration Solutions Melbourne Australia

Banks will probably raise interest rates above and beyond any official increases announced by the Reserve Bank over the next few months as they move to shore up margins after the federal government ends its wholesale funding guarantee.

The Rudd government said yesterday it will scrap its $190 billion wholesale funding guarantee on March 31.

That could create a new reason for banks - many of which hiked rates by much bigger margins than the 25-basis-point rise announced by the central bank in December - to ask borrowers to pay more.

Announcing the end of the guarantee, Treasurer Wayne Swan warned banks against excessive rates rises.

"It's difficult to determine where the banks would be on a mortgage prices, but I wouldn't be surprised to see the banks lead with another move similar to what Westpac, ANZ and Commonwealth Bank did in December," said Macquarie banking analyst Tom Quarmby.

Because of the pressure from the customers and politicians, banks are reluctant to increase rates by small increments. If they are going to face the public's wrath, they need to make it worth their while, he said.

Westpac outraged customers in December by adding 45 basis points to the cost of the variable mortgage rate – 20 basis points above the RBA's increase. ANZ Bank and CBA raised mortgage rates by 35 and 37 basis points respectively. Only National Australia Bank did not increase them above the central bank's level.

The market is forecasting only a one-in-five chance of a 25-basis-point rise in March. A 25-basis-point rate rise adds about $45 to the average cost of a $300,000, 25-year loan.

Southern Cross Securities banking analyst TS Lim said out-of-step rate rises were "inevitable".

Mr Lim said the government is anxious to remove the guarantee - halting it one-and-a-half years ahead of schedule. "They want to make sure the banks don't get too many benefits from the tax payer because it's…an election year."

There are other factors, as well, Mr Quarmby said. "I think there will be further repricing but it is going to be aimed mostly at maintaining the current margin," he said.

Banks face increased capital requirements under the Basel II framework – an international banking reform aimed in part at increasing the stability of the banking sector.

Also, new liquidity rules proposed by Australian Prudential Regulation Authority last year will increase the amount of funds need on hand by the banks, absorbing money that would otherwise go into bank profits.

(Source from: TheAge)