Big bank leads off the rises

Even though the Reserve Bank raised rates on Wednesday, it is only this morning that the first major bank, WestpacTrust has raised its floating mortgage rate.

Friday, March 22nd 2002, 11:10AM

by Jenny Ruth

Even though the Reserve Bank raised rates on Wednesday, it is only this morning that the first major bank, WestpacTrust has raised its floating mortgage rate.

And while the central bank raised its official cash rate only 25 basis points from 4.75% to 5%, WestpacTrust has raised its floating rate 50 points from 6.7% to 7.2%.

So, why did it take so long? When the Reserve Bank was cutting rates, all the major banks would follow suit the same day.

WestpacTrust chief economist Adrian Orr says his bank took its time to decide where the 90-day bank bill rate was going to settle – the banks fund their floating mortgages off the 90-day rate and generally price their rates anywhere between 150 and 200 points higher.

The 90-day bills are trading at 5.53% today.

"Raising your prices is never as much fund as cutting your prices," Orr says, adding that WestpacTrust is still behind the market. The 90-day bank bill rate has climbed 70 points since December, he says.

"It’s a competitive market. It’s very nerve-wracking being the first one off the block. No one wants to be that," Orr says. But finally WestpacTrust said, "let’s get real, it’s time to do business."

Late yesterday, ASB Bank chief economist Anthony Byett theorised that 7.2% was a realistic level for major banks to set their floating rates at, but that the banks would have some difficulty coming to terms with moving at twice the rate of the Reserve Bank.

"It’s been a bit of a stand-off. Each bank has been debating internally."

Nevertheless, WestpacTrust has taken a risk in moving today because another bank might decided to wrest a competitive advantage by only moving 25 points or by not moving at all, Byett says.

"The cost pressure is huge. In a bank you’ve always got cost objectives and market share objectives and you try to balance one against the other."

With the Reserve Bank expected to continue to raise rates through this year, the same scenario is likely to keep arising, he says.

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