Westpac raises interest rates

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In a sign that the next move by the Reserve Bank of Australia (RBA) could be to increase interest rates, Westpac Banking Corporation (WBC.AX) has become the first major bank to lift fixed home loan rates in almost two years.***

Westpac increased two year fixed rates to 5.19%, just a month after cutting it to a three-year low of 4.99%, suggesting that further rate cuts by the RBA are now very unlikely.

Comments by the RBA also suggest that current official cash rates are ‘clearly below normal levels’, and further signs that the next rate move will likely be upwards. Philip Lowe, a Reserve Bank assistant governor predicted that low official interest rates would lead to higher consumer spending, boost consumer sentiment and increase asset (mainly homes) prices.

Mr Lowe said he would be watching very carefully for signs of an expected increase in non-mining investment in the coming months. He also emphasised that the high dollar and the household savings rate, which has seen consumers save the equivalent of $90 billion a year since the global financial crisis, had helped the economy weather the resources boom without driving up inflation and interest rates.

While those factors have contributed to Australia’s good macroeconomic performance, ironically, they are also the same issues that have created challenges for many businesses over recent years, said Mr Lowe.

The RBA has cut official cash rates by 175 basis points since November 2011, to offset the impact of the high dollar and encourage consumers to start spending and assist the non-mining areas of the economy.

Whether the other major banks, ANZ Bank (ANZ.AX), Commonwealth Bank (CBA.AX) and National Australia Bank (NAB.AX) will follow Westpac’s lead in raising fixed home loan rates is uncertain at this stage.

Foolish takeaway

Depositors are unlikely to see their interest rates rise, as banks have previously noted competition in the sector is fierce. The costs of using deposits as funding are pressuring the banks’ margins, despite cheaper wholesale funding being available in offshore markets.

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*** UPDATE: Westpac has clarified the rise, saying it was just the end of a discount interest rate, and the rise is just a return to the normal level.

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