Issue Date: Sat 22-Sep-2018
Article Source: https://www.smh.com.au/business/banking-and-finance/how-the-big-four-banks-work-out-t...
How the big four banks work out the best day to raise interest rates
Three of the four bank chiefs will be having an agonising time on Monday deciding whether - or most likely - when to follow Westpac in raising mortgage interest rates
History overwhelmingly suggests they will and the strategy of minimising the public backlash provides them with only a small window in which to move.
Here are the factors that go into their thinking on whether to move and when to do it.
Westpac’s move has provided the other major banks with cover to follow - affording them some protection from being in the direct line of fire from government and community backlash.
Westpac was the first mover on Wednesday.
For its part Westpac chose its moment well - a week after the toppling of Malcolm Turnbull when most negative news was directed at the Canberra catastrophe - when a newly-installed prime minister and treasurer were busy getting their feet under different desks, getting new business cards printed and trying to hose down the blood in the parliament house corridors.
Thus the Coalition ruckus provided some cover for Westpac. (To have chosen the previous week in the middle of the Coalition coup would have been just too cynical.)
And why did Westpac choose a Wednesday to make its announcement?
It is typically a day when there is maximum other news around to dilute the impact of negative announcements. That’s the reason why the quieter news day of Monday is strategically a no-no for these announcements.
A move on Tuesday or Wednesday gives the other banks the opportunity to follow the first mover lead within days, thus not leaving the leader left out to hang for too long.
If the first mover chose Friday, it would be hanging out alone for the whole weekend.
Unfortunately for Westpac, its big competitors, National Australia Bank, ANZ and the Commonwealth Bank held out.
It’s a delicate balancing act for the three that have not yet moved. To follow too quickly can open them up to accusations of being ‘lemming-like’.
But if they want the public relations cover that Westpac already provided last week they cannot wait too long.
Westpac had already ploughed the road for a rate increase having warned anyone who would listen over the past six months it was under pressure on higher funding costs and would eventually have to move.
The reasoning behind Westpac capitulating first on rates was simple enough - its borrowing costs had been stubbornly higher for six months and it wanted to pass those onto customers in order to protect its profits.
The wholesale funding costs of all the banks had risen but Westpac was feeling it the hardest so was under more pressure.
Indeed Westpac and the others big banks have held out longer than they normally would have.
But all have felt boxed in by negative feeling generated by the industry’s atrocious behaviour towards customers - all of which has been laid bare during the royal commission financial services. It has made them targets.
This was a year all would have preferred to avoid of cycle interest rate rises.
I suspect it was no accident the fact that Westpac picked a moment when it had not been in the witness box in the previous round of royal commission interrogations and hasn’t scheduled for the next session. In other words it’s had a little bit of time to lay low and hide behind others that have been more heavily and recently beaten up - such as CBA and National Australia Bank.
If the other banks decide to wait a while, they may run out of opportunities.
Clearly the worst time for a bank to stick its head above the parapet would be during a royal commission hearings and they begin next week.
Parliament also starts sitting next week - another moment that banks need to lay low. By the end of September we will get an interim report from royal commission Kenneth Haynes - definitely a bad time to move.
At the end of October,start of November bank profit season muddies the waters and in mid October the bank bosses get another round of grilling before the House of Representatives.
Only a banker with a death wish wants to raise rates too close to Christmas.
I suspect Westpac is hoping like hell that the others move this week. It has already been stuck out there alone for five days.
With the Australian Competition and Consumer Commission watching the banks' behaviour closely they will want to be able to justify the size of any rate increasing - lest they be accused of gouging customers.
Tricky waters for the banks.
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