Our recent analysis of the big banks reveals a high probability of lifting their mortgage rates as a result of rising cost of funds and compliance issues, despite predictions from some economists of further easing of monetary policy the Reserve Bank.

We are not surprised that the RBA kept its cash rate at the record low of 1.75 per cent yesterday, after the 25 basis points reduction in May. The RBA could lower official rates again at its next meeting on 5 July, three days after the federal election.

However, further rate cuts by the RBA could be negated by the big banks lifting their home loan interest rates out of cycle due to cost of funding and compliance issues. The big banks have been waiting until the election is out of the way before making any moves independently of the RBA.

They want to lift rates in response to rising funding costs and the additional costs they face for the extra compliance and regulatory increase on reserves they will have to have in place by the end of June.

The recent attention from both sides of politics and the federal opposition pledge to hold a royal commission into Australia’s banking system has also tied the banks’ hands on rates until after the election.

While the RBA has room to cut its cash rate further due to the sluggish economy and subdued consumer & confidence, any future reduction is likely to be negated. Banks will look to increase their rates at the next opportunity. From where we see the situation, the best defence of paying higher home loan rates is being with a smaller boutique lender that is not facing these same financial pressures.