Westpac sees more out of cycle rate rises

Westpac managing director Gail Kelly predicted a further rise in the bank's costs of funds, driven by pricing in offshore debt markets, at between 30 and 40 basis points from current levels, The Age reported. Kelly was speaking at a private investor briefing on Friday.

Kelly also warned that further rate rises on home mortgages to recover the costs would be ''difficult'' during an election year, the newspaper reported.

The rationale for interest rate rises on loans is not wholly a function of rising funding costs, however.

In a separate interview in the Financial Review the chair of the bank's board, Ted Evans, acknowledged that one reason for the rise in the home loan rate of 45 basis points by the bank in December 2009 (and 20 basis points more than the corresponding rise in the cash rate) was that the bank was attracting too many mortgages.

The bank's rate of growth in home loans over the last year was 23 per cent, and almost three times the rate of growth of the market.

Evans noted that the trend toward higher rates would apply to deposits as well as to loans.

Tackling one current policy issue, Evans told the AFR that he preferred that the Australian Prudential Regulation Authority, rather than require banks to hold liquidity sufficient to last for 30 days (as proposed late last year and due to come into effect in 2012) should allow banks to source standby by funding from the RBA, as is the case now.

"The RBA understands the issue without a doubt and I am sure APRA does too," he said.

And dealing with one much less pressing policy issue, Evans also told the AFR that Westpac modified its position over the "four pillars" policy. The bank's former managing director, David Morgan, had dedicated some effort to making out the case for the Australian government to drop the policy.

Evans said of the four pillars policy: "I don't feel it's worth spending much time on, because it's not going to change and I don't see a great need for it to change."