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Interest cut on cards after Westpac increase

An emergency cut in official interest rates may be needed to protect the economy after Westpac revealed it would drive up its mortgage rates despite posting a near $8 billion profit.

In a surprise move that the bank claimed yesterday was needed to comply with new regulations aimed at safeguarding the Australian financial system, Westpac said its customers would face a 0.2 percentage point lift in mortgage rates from November 20.

The move will add about $35 a month to repayments on a $300,000 home loan or, over its 25-year term, more than $13,000.

It will be the first variable lending rate increase for Westpac consumers in three years and could net the bank almost $600 million annually in extra revenue.

The bank will also increase rates on mortgages for investment properties, while depositors will get some respite with a 0.25 percentage point lift in interest rates.

Westpac’s consumer bank chief executive George Frazis said the increase in lending rates, which will take its headline mortgage rate to 5.68 per cent, was needed to offset the cost of holding more cash.

“This is a difficult decision and one that is not taken lightly,” he said. “We acknowledge that it does impact customers, even in an environment where interest rates remain near historic lows.”

The bank, which plans to raise an extra $3.5 billion from the sharemarket to help meet the new capital regulations, also announced it would increase dividends to shareholders.

The decision is tipped to be followed by the other major banks, which face requirements to lift their capital holdings to improve their overall safety. It comes as the economy slows and wages barely keep pace with inflation.

AMP Capital chief economist Shane Oliver said Westpac’s decision had increased the likelihood that the Reserve Bank would use its Melbourne Cup Day meeting to cut official interest rates to 1.75 per cent.

“With growth stuck around 2 per cent and the mining investment downturn only about halfway through, the last thing the economy needs now is a rate hike for the 30 to 40 per cent of households who have a mortgage, given the threat it will pose to consumer spending,” he said. “The best way to avoid this is for the RBA to cut the official cash rate to offset the higher funding costs the banks now face.”

In Opposition, the coalition castigated the then-government when banks lifted interest rates outside a move in official rates. But the Government was silent yesterday on Westpac’s move, with Assistant Treasurer Kelly O’Dwyer saying it was up to Westpac to explain its decision.

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