Europe woes increase bank funding costs

The brokerage’s chief operating officer, Dean Rushton, said the problems currently facing Europe could result in higher funding costs for Australia’s banks, forcing them to move independently of any official increase in the cash rate.

Mr Rushton said this situation made it imperative that the RBA keeps official rates on hold when it deliberates at its next monthly board meeting on Tuesday.

“A variety of factors should influence the RBA to leave the cash rate alone next month,” Mr Rushton said.

“The situation in Europe, focussed on the financial disaster in Greece, is likely to lead to higher funding costs for Australian banks and they will face pressures to pass that cost onto borrowers.

“There are already other factors which should persuade the RBA to keep rates on hold.

“Housing finance activity has been in decline for several months now and we are also seeing a significant drop in consumer confidence.

“The RBA has been concerned about rising property prices but this is more to do with a lack of supply in certain markets such as Sydney and Melbourne rather than evidence of an overheated economy.”

Major banks last year broke ranks from the RBA, raising variable mortgage rates due to increased funding costs.

Mr Rushton said with the precedent already in place, Australia’s banks wouldn’t hesitate to move out of line with the RBA again if they feel funding pressures are too taxing.