Bendigo follows ANZ lead

Bendigo and Adelaide Bank plans to follow the path being laid down by ANZ and will adjust home loan rates in a manner - and at a time - more clearly tied to its own funding costs rather than to shifts in the cash rate.

On Friday, Bendigo said it would reduce the variable home-loan rate on its primary mortgage product by 25 basis points to 7.30 per cent. The new rate will apply from December 30, 2012, about two weeks late than the cut announced by some lenders.

In a prepared statement, Mike Hirst, Bendigo's managing director, said that "in our future decisions we will seek to more closely reflect our actual cost of funds and balance the effect between borrowers and depositors."

The bank did not say how often it might review home loan rates, Bendigo may still need to work out the operational features of its new policy.

At this stage, Bendigo is unlikely to follow a fixed schedule of monthly reviews of home loan pricing, such as the second Friday of each month, as foreshadowed last week by ANZ. Bendigo is also considering what shifts in its funding costs would warrant a change in pricing of variable-rate home loans.

If Bendigo and ANZ follow through and change home-loan pricing in line with funding costs it means the fourth- and fifth-largest providers of home-loan finance will have a new approach to setting interest rates by early 2012. The two banks have a combined market share of 17 per cent (based on loans funded only by banks).

Bendigo adopted an exasperated tone in the statement issued in Hirst's name. It reflected surprise at the separate decision by ANZ (and copied by other major banks) to reduce variable-rate home loans by 25 basis points in line with the cut in the cash rate by the Reserve Bank of Australia last week.

Hirst said that "the movements we have seen banks make this week were largely driven by a popular misconception that there is an exact correlation between the official cash rate and home loan funding costs.

"Movements in the Reserve Bank overnight cash rate actually have little bearing on the cost of the funds we require to support the borrowing needs of our customers and partners.

"In fact while the Reserve Bank has been lowering the overnight cash rate [since November], the cost of funding our lending has been increasing, largely because of the consequences of events in Europe."

The plan announced by ANZ on Thursday attracted some direct and indirect criticism by federal politicians on Friday.

Treasurer Wayne Swan said that "it's entirely a matter for the ANZ but I just make the point that when they take their decisions there will be very close scrutiny of that decision and their customers will be able to judge whether they're offering competitive rates or not."

Coalition finance spokesperson Andrew Robb told the Australian Financial Review that there was "no obvious logic" to the ANZ move. "All it will do is create uncertainty during the delay," he said.