Swan warns banks over mortgage rates increase

CANBERRA - Banks have been put on notice by the federal government and finance unions as the chances of an official interest rate rise today diminished marginally on the back of an indicator showing inflation pressures easing.

At the same time, the nation's largest mortgage broker warned the traditional spring increase in housing loans has failed to materialise.

The futures market is pricing in about a 60 per cent chance the Reserve Bank will lift its cash rate from 4.5 per cent to 4.75 per cent.

Senior bank officials in recent weeks have adopted what one analyst described as "hawkish rhetoric" on rates in a bid to address concerns about the impact a second mining boom could have on inflation.

But an unofficial indicator of inflation, the TD Securities Melbourne Institute Monthly Inflation Gauge, appears to show inflationary pressures easing during the past three months.

The gauge, released on Monday, rose by 0.1 per cent in September, following a 0.2 per cent rise in August and a 0.1 per cent rise in July.

While the annual rate of 3.2 per cent breached the Reserve Bank's 2 to 3 per cent inflation target band, the gauge indicates inflation was benign during the September quarter and possibly continuing through to June 2011.

TD Securities senior strategist Annette Beacher said the central bank's decision today would be a very close call.

If the Reserve Bank raises its cash rate, there is a high expectation banks will follow up with their own rate rises on mortgages and give the central bank enough reason to hold its rate at 4.75 per cent until 2011.

A 25 basis point rate rise will add about $50 a month to repayments on a $300,000 mortgage.

"We expect the variable mortgage rate to be lifted by considerably more than the 25 basis point increase in the cash rate, ameliorating the need for any additional RBA action this year," Beacher said.

Federal Treasurer Wayne Swan is not impressed with that prospect.

"I don't think there is any justification whatsoever for any bank to move above the official cash rate decision of the Reserve Bank," he said yesterday.

"Banks are making healthy profits at the moment; their net interest margins are back above what they were before the global financial crisis."

Swan's message was echoed by the Finance Sector Union, which said many Australians were feeling the burden of debt.

"The major banks need to accept some responsibility for this trend," national secretary Leon Carter said.

"At a time of record bank profits and executive remuneration, it is hard to accept arguments that funding pressures warrant a rate rise."

AFG, Australia's largest mortgage broker, says September sales data show the traditional spring increase in mortgage sales has failed to materialise.

September sales were 20 per cent lower last year with Queensland (down 32 per cent) and Western Australia (26 per cent) pulling down the national result.

"There is a lot of caution and uncertainty in the market right now," AFG's Mark Hewitt said.

"Potential property buyers are still digesting the previous six rate rises and uncertain economic messages."

- AAP