Westpac Banking Corporation chief executive Gail Kelly says the average cost of funding will continue to rise, putting pressure on Australia’s second biggest lender as it considers its lending rates.

Pressure would also come from higher deposit rates as the banks compete to keep customer savings, she said at a media conference on Wednesday, following Westpac’s full-year earnings announcement.

Mrs Kelly also said the Reserve Bank of Australia’s successive 25 basis point cash rate increases were appropriate, given the indications that the economic downturn wasn’t going to be as bad as first thought.

“Savings are going to be rewarded more, and debt is going to cost more for everyone, whether you’re an individual, a business, a corporate, or a bank,” she said.

“We’re paying more for deposits because they’re such a valuable asset for our customers and for us.”

Westpac said the marginal cost of Australian term wholesale funding went from below 20 basis points over the swap rate in September 2007 to a peak of almost 200 basis points in September 2008.

The cost is just over 90 basis points now.

The bank has also projected that, if everything stays at current levels, the average cost of funding will continue to rise from about the current 50 basis points over swap to almost 80 basis points in two years.

Chief financial officer Phil Coffey said the rate of increase would slow if the marginal cost of funding fell further in coming months.

That means Westpac may raise its interest rates more than the RBA’s cash rate increases.

“The costs of funds are linked to a lot of things not much linked to the Reserve Bank rate,” Mrs Kelly said.

At the same time, mortgage holders and other borrowers are facing potential cash rate increases from the RBA.

The overnight cash rate is currently at 3.5 per cent.

The four major banks, including Westpac, announced on Tuesday they would match the RBA’s 25 basis point rate increase.
Mrs Kelly said that in May, economists were predicting unemployment to rise to 8.5 per cent or higher and for the economy to go into recession.

But the government’s fiscal stimulus and the RBA’s swift rate reductions had averted the worst case scenario, she said.

“A recovery started to emerge and confidence started to emerge and on the back of that it’s appropriate to move off those emergency lows,” she said.

The rate rises have “been modest and I think the Reserve Bank’s done a good job”.

Her view contrasts with that of ANZ Banking Group Ltd chief executive Mike Smith who suggested the RBA might have been hasty in raising rates.

On deposits, Mrs Kelly said the government should consider ways to make saving money more attractive.

“We are a very indebted country,” she said.

“We were drawn in to the financial crisis because of our vulnerability to offshore funding markets.

“There may be some tax incentives that come the way of savings.”

AAP