This week was the first evidence that mortgage rates can rise even without RBA hikes.
This week was the first evidence that mortgage rates can rise even without RBA hikes. Phil Carrick

It’s been an exciting week for markets, what with Fed rate hikes, Facebook fails and the rising threat of a trade war between the world’s two largest economies. While these have – rightly – got all the headlines, there have been some interesting, and somewhat worrying, developments happening behind the scenes.

With so much going on, it’s no surprise that news Suncorp was lifting its key mortgage rate by 0.05 percentage points failed to cause much of a stir. Even without all that background noise it would be hard to get excited by a small lift in a regional bank’s lending rate.

If the size of the lift was unimpressive, the reason for it is worth our attention.

Suncorp’s banking and wealth CEO, David Carter, said the decision was based in part on the rising costs of funding.

Carter explained in a statement: “We have seen the key base cost of funding, being the three-month bank bill swap rate, rise approximately 0.2 [percentage points]. This increase results in higher interest costs to our wholesale funding, as well as our retail funding portfolio, such as term deposits.”

Indeed, since late last year the bank bill swap rate, or BBSW, has jumped 0.25 percentage points after showing a sharp acceleration in February. You may have heard about the BBSW for a couple of reasons. First off, it’s the one the banks have been rigging to their own advantage for a number of years.

The other notable thing about the BBSW is that it is the reference point used to set interest rates on most business loans, and also flows through to personal lending rates.

That means that over the past few months Aussie companies with exposure to variable-rate loans have just received the equivalent of a rate hike, ANZ rates strategist Martin Whetton says.

As we see from Suncorp, the relationship is not one-to-one when it comes to personal lending. That’s because the large bulk of bank funding is long-term in nature. Plus, banks always have the choice to swallow the hit to their margins – particularly if they are in the middle of a reputation-tarnishing royal commission and would prefer to avoid the negative PR.