September 6, 2018 / 4:06 AM / 3 months ago

UPDATE 3-Australia's big banks raise mortgage rates, risk political backlash

* Three biggest lenders have now raised rates

* Stock market down amid concerns of house price squeeze

* Australian central bank not expected to raise rates until 2020 (Adds UBS analyst quote)

By Byron Kaye and Rushil Dutta

SYDNEY/BENGALURU, Sept 6 (Reuters) - Two of Australia’s biggest banks, Commonwealth Bank of Australia and Australia and New Zealand Banking Group, raised mortgage rates citing higher funding costs, cutting chances of an official rate hike and risking a political backlash.

The moves on Thursday came a week after No. 2 Australian lender Westpac Banking Corp became the first of the so-called “Big Four” to raise rates. Fourth-ranked National Australia Bank Ltd is the only one of the majors not to deliver an out-of-cycle rate rise.

The decision reverses, at least partly, moves of just a month earlier when some banks cut rates as a downturn in the country’s red-hot housing market heightened competition to write new loans.

The rate increases come even as the Reserve Bank of Australia has held its official cash rate at a record low of 1.50 percent since 2016 and signaled a steady path for some time.

The Australian dollar was 0.15 percent weaker after CBA, the country’s biggest lender, and third-ranked ANZ announced their rate hikes within minutes of each other.

The benchmark ASX/S&P index added to morning losses, down 1.1 percent by the close, as investors digested the prospect that rising rates would hurt home prices further, stifling spending.

The banks erased most of their earlier losses, trading down about a third of a percentage point, amid hopes the rate hikes would preserve their interest margins.

“It’s a small negative for housing prices but part of a much larger trend towards the normalisation of interest rates,” said Michael McCarthy, Chief strategist at CMC Markets and Stockbroking.

“That of course is likely to continue to keep pressure on housing prices,” he added.

“OLIGOPOLISTIC”

The four banks combined control about 80 percent of the country’s deposit and home loan market. The banks have come under intense scrutiny, wiping tens of billions of dollars from their market capitalisations, from a public inquiry which has aired continuous allegations of misconduct within the sector.

In a client note, UBS analysts said the hikes appeared to be far larger by dollar value than the funding cost increases cited by the banks, and the out-of-cycle move raised the chances the government would raise a new special tax on banks.

“Today’s announcements demonstrate the oligopolistic nature of the Australian banks and their ability to pass on additional funding costs and more to their customers,” the note said.

“Given the additional focus from both sides of politics (on the banking sector) there is a risk the government or opposition may look to raise the bank levy,” it added.

ANZ said in its statement that its rate hikes would not apply to people in areas declared to be officially in drought.

A month after cutting variable home loan rates by 0.34 percent, it said it would now raise variable rates by 0.16 percent.

CBA, which recently cut some fixed mortgages by 0.10 percent, said it was now hiking rates by 15 basis points.

A spokeswoman for NAB, the only lender not to lift rates on Thursday, said in an email the bank continually assessed interest rates and tried to “achieve the right balance for our customers and our shareholders, and to ensure we remain competitive”. (Reporting By Rushil Dutta, Additional reporting by Nikhil Nainan in Bengaluru; Editing by Byron Kaye and Muralikumar Anantharaman)

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