The Second Domino Falls

This afternoon the Commonwealth Bank announced it would be following Westpac's lead and raising variable interest rates for all existing borrowers by 0.15% on 20th November (which so happens to be the same day that Westpac will be moving).

Westpac's signal has now been met with a response.  Soon the atmosphere will be thick with smoke as other lenders join the feast with their own price adjustments.

I am all for a strong, safe and secure banking system in Australia.  The alternative is far far worse. Therefore, the move by APRA to force stronger capital positions by the major banks is a positive development.  It will also serve to improve competition in the lending market since it substantially improves the competitive funding position of the smaller lenders.  However, we are entitled to question whether the magnitude of the announced rate increases can really be justified.

Given the current volatility it is not a good time for borrowers to be switching from one lender to another to chase 15 or 20 points in rate differential.  As we have seen last week and today, that differential can disappear in a single afternoon.  If we factor in a possible RBA cash rate cut between now and the end of the year then perhaps we will all end up in pretty much the same positions on the dance floor as when the music started!