Renewed pressure likely on RBA as rate cut discussion intensifies

The RBA board minutes are more important than usual should they contain any discussion of bank funding costs. The cash rate remains on hold at 2% all next year, although there is the risk of a cut, given the more uncertain outlook for China. 

The risk of a cut has increased because one large domestic bank recently announced that it is increasing all variable mortgage rates by 20bp to compensate for the regulator's requiring it to hold more capital, where the regulator is seeking to even up competition with smaller lenders. 

This decision is significant because other large banks may also raise mortgage rates and since the RBA has repeatedly said that when setting policy, lending rates matter more than the level of the cash rate. 

"Although there is a larger risk of a rate cut because of this development, the RBA will not automatically cut the cash rate to offset the mortgage rate hikes by the large banks. However, there has been indirect signalling that the RBA may cut rates if other banks follow the first one's lead", says Barclays. 

This suggests that the RBA had been assuming that the large banks would either raise mortgage rates in line with the regulator's analysis or confine the rate rises to investor home loans. 

The RBA now has a reasonable idea of the other banks' intentions, where an outsized move in rates could push the RBA over the line for a November cut. At this stage, the policy will remain on hold, but the risk of a move has increased, and more indirect signalling from the RBA is awaited , possibly reinforced by judicious editing of next week's board minutes, as the large banks are to announce their plans.