# Westpac interest rate hike



## jbocker (15 October 2015)

I was unimpressed with this move on rates, which is on the back of the rate increases for investment loans done by banks only several weeks back.
The Fed reserve rate means nothing it seems, as the banks dont pass on the full rates when there is a drop and now claim increases when there is no increase from the Reserve.
I appreciate there are so called reasons for the 'increase', but frankly it does not gel with me, and today I have moved all money from my accounts and also now researching where I will trade my shares through, I will move those accounts when that is done.
I don't think the bank is in tune with the day to day people on the street who have lost jobs, taken cuts in pay and businesses that have tightened their costs etc. It was time I moved with my feet and I have, after personally explaining at length with my bank manager how unimpressed I am. I also went to my other banks and asked them for their share trade information, and let them know that I will be moving two substantial accounts from Westpac.

One bit of feedback from the manager was, that they have had several complaints already and the management had told them to do what they can with a better offer for their clients who are disturbed by the increase. 
Might be worth a chat if you have a loan with the bloodsuckers. I don't have a loan with them.

Footnote: I had a bad phone experience  with The National Bank (now NAB) back in the 70s over my first Bankcard (the original credit card). I was sworn at over the phone for missing a payment. Banks were a lot less friendly back then!! Closed all accounts and haven't been back since. Westpac might be next.


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## Junior (16 October 2015)

I can't believe the punters out there are complaining about one bank hiking 0.20%.  Mortgage rates are the lowest they've been in 50 years.  If you want the best rate, do not shop at the Big 4!

http://www.loansense.com.au/historical-rates.html


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## tech/a (16 October 2015)

Junior said:


> I can't believe the punters out there are complaining about one bank hiking 0.20%.  Mortgage rates are the lowest they've been in 50 years.  If you want the best rate, do not shop at the Big 4!
> 
> http://www.loansense.com.au/historical-rates.html




Obviously they want to decrease demand.(For their product)


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## againsthegrain (16 October 2015)

This is a actually very good move,  the other banks also nerd to raise their rates. 

What all the so called investors don't understand you cant have it both ways,  keep celebrating with champagne while their houses keep going up,  rates down and estage agents best friends. 
As soon as the tide changes everybody is enemy no1 and trying to ruin the aussie battler. 
The banks are actually trying to protect themselves from the mess the clever mum and dad investors have made with their bulletproof investments. 
Nobody worries about share holders and savers when things go other way but suddenly banks are the biggest evil when your loan goes up 20  bux a month


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## CanOz (16 October 2015)

againsthegrain said:


> This is a actually very good move,  the other banks also nerd to raise their rates.
> 
> What all the so called investors don't understand you cant have it both ways,  keep celebrating with champagne while their houses keep going up,  rates down and estage agents best friends.
> As soon as the tide changes everybody is enemy no1 and trying to ruin the aussie battler.
> ...




Well this is the thing for me, I don't mind the rate increase if it means the banks balance sheet is stronger and safer. We've got two substantial loans with westpac, but we pay no interest because they're 100% offset. I wouldn't be surprising if the other banks follow....


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## tech/a (16 October 2015)

Well as of my last property sale a few weeks ago
The only bank lending I have is on developments.
2 in the pipeline.

All rentals are gone!

No more maintenance
No more insurance
No more tenants

No more mortgages!

In my view the only way to make bank money work for you
in property is to *CREATE* the margin.

Better buying at the front end.
Better development management.----(pre approvals) **(Project management)
Tighter contracts particularly on timeframe---(less holding costs.)
Better sales at the back end.
12-18% on the total project is achievable over approx. 12 mths.
So if your 500K down on a $2 million project that's $240-360K on capital.
Rent for 12 months then sell for less capital gain tax.

That's a no brainer for me.
Particularly if you can get ** right. It doesn't take a lot of work from me.


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## sinner (16 October 2015)

jbocker said:


> I was unimpressed with this move on rates, which is on the back of the rate increases for investment loans done by banks only several weeks back.
> The Fed reserve rate means nothing it seems, as the banks dont pass on the full rates when there is a drop and now claim increases when there is no increase from the Reserve.
> I appreciate there are so called reasons for the 'increase', but frankly it does not gel with me, and today I have moved all money from my accounts and also now researching where I will trade my shares through, I will move those accounts when that is done.
> I don't think the bank is in tune with the day to day people on the street who have lost jobs, taken cuts in pay and businesses that have tightened their costs etc.




This is irrational and belies a lack of understanding of the banking and financial system.

Mortgages are bonds. In bond land, the bond buyer is the lender and the bond issuer is the borrower. The rate charged is a function of multiple factors, the Central Bank rate charged on bank reserves being only one.

More and most importantly, the rate charged is a function of counterparty risk to the bank (that is, bond issuers defaulting). i.e. your creditworthiness. But also important is aggregate bond issuance.

If lots of mortgagees are "issuing bonds" aka selling bonds, what happens to bond prices? They go down. Bond prices down == bond yields up. 

Mortgage origination is at all time highs. Yields should move commensurately to account for that. That they only need to go up 20bps is a sign of the immense demand to loan money to Aussie realestate speculators and homeowners.

You will note that Westpac did not increase rates on fixed loans where the risk is lower (and demand for fixed mortgages is also low since the higher rate reflects a more sane long term forecast rate) and did increase the rate for some term deposits commensurately.

The view spruiked by the media that banks need to "pass on" rate cuts on bank reserves from the local CB is naive and incorrect. In a credit economy banks loan money into existence largely only on the basis of the borrowers perceived creditworthiness.


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## GGoose (19 October 2015)

CanOz said:


> Well this is the thing for me, I don't mind the rate increase if it means the banks balance sheet is stronger and safer. We've got two substantial loans with westpac, but we pay no interest because they're 100% offset. I wouldn't be surprising if the other banks follow....




It's a good move that the other banks need to follow. We need our banks to be as strong as they can because so many superannuation companies have substantial bank holdings.  It's a very small rise at a time when rates are already very low.  I understand that no one likes to pay more but there is a bigger picture that needs to be considered.


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## Valued (19 October 2015)

The OP mentioned that if the banks don't pass on reductions in the interest rate of the RBA then it doesn't mean anything. I thought about this for a little bit. I only have recently started reading about macroeconomics. If the RBA cut interest rates and the banks never passed it on then wouldn't the banks simply be paying less interest to lend from the RBA and so now they would have more money to lend on to other people? If the demand isn't there then the banks would be forced to cut interest rates and pass it on then, and that would explain why they sometimes don't pass on the entire rate. If the demand is still there then they have no reason to pass on the interest rate cuts. Am I on the right track here? It would seem like an absurd and unsustainable system otherwise since the central bank couldn't actually control inflation through interest rates if it merely depended on the banks, therefore putting the banks in the position of the central bank and having interest rates determined by a free market (but then the more I think about it, there may be advocates of a free market determining interest rates, not sure if that works).


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## sptrawler (19 October 2015)

GGoose said:


> It's a good move that the other banks need to follow. We need our banks to be as strong as they can because so many superannuation companies have substantial bank holdings.  It's a very small rise at a time when rates are already very low.  I understand that no one likes to pay more but there is a bigger picture that needs to be considered.




There certainly is a bigger picture, you can't just keep reducing borrowing costs, as it has a corresponding adverse effect on deposits.

Then the reduction in deposit shortfalls, has to be funded from overseas borrowings, which exposes us to currency and O/S interest rate fluctuations.

For every winner there's a loser, Westpac have made a sensible move IMO, mitigating basel 3 costs. 
While massaging their margin, to sustain their dividend.


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## DeepState (19 October 2015)

Valued said:


> 1. If the RBA cut interest rates and the banks never passed it on then wouldn't the banks simply be paying less interest to lend from the RBA and so now they would have more money to lend on to other people?
> 
> 2. If the demand isn't there then the banks would be forced to cut interest rates and pass it on then, and that would explain why they sometimes don't pass on the entire rate. If the demand is still there then they have no reason to pass on the interest rate cuts. Am I on the right track here?
> 
> 3. It would seem like an absurd and unsustainable system otherwise since the central bank couldn't actually control inflation through interest rates if it merely depended on the banks, therefore putting the banks in the position of the central bank and having interest rates determined by a free market (but then the more I think about it, there may be advocates of a free market determining interest rates, not sure if that works).




1. Banks borrow very little from the RBA.  When they seek to borrow from the RBA itself in material volume, there is usually a major financial calamity in action.  Movement in the RBA rate impacts the rate of interest paid and received by banks between each other.  This flows out to impact other rates of interest in things like housing, consumer, corporate loans etc.

In isolation, by not passing on interest rate cuts, the banks increase their profit.  In some way, this can increase the amount of money they could loan out and still meet the capital requirements determined by APRA.  In reality, most banks cannot grow their balance sheets fast enough to absorb their profitability, so increased bank profitability on its own will not lead to a less constrained rate of credit expansion.


2. Don't forget about supply.  However, yes, the rate of interest paid on deposits, loans and other things will be governed by the laws of demand and supply to some degree.  However, the RBA interest rate serves as a strong anchor.  Ultimately, a bank would not lend at a rate that even matches the RBA rate for a sustained period of time. Further, a bank would not pay more than a small amount over the RBA interest rate for at call deposits because it can finance itself cheaper elsewhere. What you are referring to is the margin above the RBA rate (actually, it is BBSW) that the market will focus on.  The difference between rate of interest received on loans and that paid by the bank for deposits etc (divided by the loan book) is called the net interest margin.  


3. There are schools of thought who believe that we may be better off not having central banks setting monetary policy.  It used to be thus.


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## Valued (20 October 2015)

Thanks for the reply, it's obviously all more complicated than I first thought. I am going to have to read more about how the RBA actually influences the economy. It's always helpful to know how to learn more. I want to learn but then sometimes I get lost, usually thinking "it can't be this simple, but I don't know what I don't know".


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## Klogg (20 October 2015)

Valued said:


> Thanks for the reply, it's obviously all more complicated than I first thought. I am going to have to read more about how the RBA actually influences the economy. It's always helpful to know how to learn more. I want to learn but then sometimes I get lost, usually thinking "it can't be this simple, but I don't know what I don't know".




There's a great resource for this - "Money and Banking" on Coursera, parts 1 and 2.

I downloaded the lectures and watched them on my phone whilst on the train. Great series.


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## Valued (20 October 2015)

Klogg said:


> There's a great resource for this - "Money and Banking" on Coursera, parts 1 and 2.
> 
> I downloaded the lectures and watched them on my phone whilst on the train. Great series.




Thanks. It seems you can't access them right now though but the courses may be available in the future. 

Khan Academy seems to have a lot of videos on money and banking at https://www.khanacademy.org/economics-finance-domain/core-finance/money-and-banking so I might start with those but I suspect it may take some time to get through them all. The only problem with Khan Academy is that it is kind of slow/feels like it is aimed at a young audience (which it is).


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## jbocker (24 October 2015)

Whew!! all the other big 3 have now raised the rates. It reads to me like everybody should be happy now.

Now I hear news that the RBA may cut rates on November 3. So I take it, that wont get passed on, but will help the banks be a little bit stronger. Oh what a relief.


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