The cost of credit to 15 years high

By Scott Murdoch

March 03, 2008 12:00 am
Article: The Australian


TURMOIL in the global credit market has pushed the cost of borrowing for business in Australia in 15 years than the major banks struggle to control the cost of funding regardless of official interest rates.

While the Reserve Bank is likely to push up official rates at least half a percentage point in coming months, the cost of borrowing could increase by more money in the markets.

Financial markets are unanimous that an increase of 25 basis points will be provided by the central bank tomorrow, taking the official cash rate to 7.25 percent.

"In all likelihood, there will be another after next month's meeting of the board of directors," HSBC chief economist John Edwards said yesterday. "We can not exclude the increases beyond 7.5 percent. "

More hikes coming

The first rise in mortgage rates will grow by more than 9 percent, the highest level in more than a decade, as the Reserve Bank of battles to maintain its goal of fighting inflation.

Economists have predicted that the extreme narrowness of the market in most of the money will encourage retail banks to raise anew the variable lending rate, after all the majors moved in January.

A new round of rate hikes will bank on a collision course with the Treasurer Wayne Swan at a time, it plans to target the legislation unpopular bank charges.

The interest rate rise tomorrow will be a double whammy for companies whose loans have already been affected by the closure of awareness in the bond markets.

Liquidation in the cost of credit

ABN AMRO Kieran Davies, chief economist said that funding for the wholesale market was tighter now than at the height of the credit crunch that emerged last year. Concern growing unrest American financial markets and conservative lending practices have caused an eruption in credit spreads.

The gap between the three-month bank bill swap rate and the expected rate treasury is now 65 basis points - nearly six times the historical average of 11 basis points.

Mr. Davies said the difference between three months Libor (London interbank offered rate) and the cash rate was nearly 100 basis points, almost as many as during the LTCM crisis in 1998.

The yield on three fiscal years has blown document to 8.9 percent, up 180 basis points, while the three-month bank bill hit 7.99 percent.

"The Regional Office for Africa has been unable to stop the interest rate on the money market to climb higher, but it is possible that the bank has prevented an increase even more important," said Davies.

"For businesses, this rise in interest rates fed through to the very sharp increase in borrowing costs."

Mr. Davies said there was a significant risk that the operations of banks implement a new round of rate increases of 10 to 15 basis points.

"Given the sharp increase in the cost of financing faced by large banks, we expect that banks continue to increase the rates of loans to businesses," he said.

The initiatives were foreshadowed by Commonwealth Bank CEO Ralph Norris and National Australia Bank's John Stewart said rate increases were also likely.

Economic data released by the Reserve Bank showed on Friday there was still strong borrowing by the private sector, despite the credit crunch.

Citi economy CEO Stephen Halmarick, said a higher rate of cash should put pressure on the company's debt repayment.

"The rate will probably be raised by more than the amount fixed by the Regional Bureau for Africa," said Dr. Halmarick.

"The corporate bond market was virtually closed, so companies had to go to the bank and took market share."