Westpac Lifts Variable Mortgage Rates 0.5 Points, First Major Bank to Pass On RBA's Jumbo Hike

Westpac moved first. Within hours of the Reserve Bank's announcement on Tuesday, it said it would lift its variable home-loan rates by half a percentage point from June 21, making it the first major bank to pass the central bank's surprise increase on to borrowers in full. The change brings its standard variable rate for owner-occupiers paying principal and interest to 5.23 per cent.

The decision followed the Reserve Bank's move to raise the cash rate from 0.35 per cent to 0.85 per cent. It was the second increase in two months, larger than markets expected, and the biggest single hike since 2000. The aim is to curb surging inflation: the cost of living rose 5.1 per cent over the past year, pushed higher by global supply chain disruptions and the war in Ukraine.

For borrowers, the arithmetic is direct. When banks pass the rise on in full, it adds $133 a month to repayments on a $500,000 loan over 25 years, and $265 a month on a $1 million loan. Chris de Bruin, Westpac's Consumer and Business Banking chief executive, said a rate change affects every budget differently. He added that customers had managed their finances carefully through the pandemic, with many putting more money into savings and offset accounts, so the majority were ahead on repayments and had a buffer to absorb an increase.

Savers got far less. Westpac said it would introduce a 12-month term deposit paying 2.25 per cent from June 9, while its other deposit rates remained under review. Sally Tindall, research director at RateCity, called it hugely disappointing that nothing had been passed on to existing savings accounts at this stage, and told savers hoping for a big boost not to hold their breath. She noted that after the May hike, banks were quick to raise home-loan rates, yet two out of five did not touch their savings rates. Where savings rates did rise, often only select accounts were lifted and others stayed very low.

Tindall pointed to a possible reason. The latest APRA figures for April show Australian households holding a record $1.27 trillion in the bank, up $281 billion since the pandemic began. In her view, many banks will not substantially lift savings rates until Australians start spending down that cash. Her advice was that serious savers may need to shop around and be prepared to meet conditions to qualify for higher rates. Other major banks are expected to follow Westpac in passing the full rise to borrowers rather than savers.

Reserve Bank governor Philip Lowe said higher electricity and gas prices and recent petrol increases mean inflation is likely to be higher in the near term than expected a month ago. He expects it to rise further before falling back toward the 2 to 3 per cent target range next year, a signal that more increases are coming. The move echoed hikes by the US Federal Reserve, the Reserve Bank of New Zealand and the Bank of Canada. Locally, the ASX 200 fell 1.5 per cent to 7,096.

Economists are already forecasting what comes next. CBA, Westpac and Deutsche Bank expect another half-point rise in July, while ANZ predicts a quarter-point in July followed by a half-point in August. ANZ's David Plank said one or two more hikes over the rest of 2022 are possible if the data stay resilient. CBA expects the cash rate to reach 2.1 per cent by year's end; Deutsche Bank says it could get there as soon as October, and then expects a pause, according to chief economist Phil O'Donaghoe. CBA's Gareth Aird cautioned that because of the lag between policy changes and consumer prices, inflation data over the next two quarters will be very strong regardless.

What to watch now: whether the other major banks match Westpac on mortgages, and whether any of them pass meaningful increases on to savers.