Interest Rates For Businesses Rise In Step With Home Loans

INTEREST rates on large business loans have risen an estimated 35 basis points over the past three months, with mortgage lenders passing on similar increases as a result of higher borrowing costs.

In its Statement on Monetary Policy, released yesterday, the Reserve Bank warned of further rate rises. It said tight capacity conditions remained, forcing the central bank to revise its inflation forecast upwards for the next six months to above 3 per cent, higher than its target band.

The central bank is also expecting a "delayed and more gradual" recovery in the farm sector, forecasting that growth in gross domestic product will hit 3.75 per cent in 2007-08 and 3.5 per cent in 2008-09.

Treasurer Peter Costello has been careful not to predict higher inflation, relying on more subdued Treasury estimates.

The central bank said financial market volatility had not significantly affected the operations of Australian banks, but it reported that lending rates set by providers of riskier loans had risen above the official cash rate.

The heads of Australia's major banks have warned that they may pass on higher borrowing costs regardless of what the Reserve Bank does.

For prime low-doc loans, which account for about 8 per cent of outstanding loans, the average variable rate has risen 35 basis points since July - 10 basis points more than the increase in the cash rate. The figures do not take into account last week's 25-basis-point rate rise. The statement said smaller banks had needed to increase rates by more than larger banks. Mortgage originators' average prime low-doc rate rose 43 basis points in the period while interest rates on non-conforming loans (which account for 1 per cent of outstanding home loans) rose 100 basis points.

The statement said that about 45 per cent of large business loans - loans greater than $2 million - were directly priced off bank bills, with rates estimated to have risen 45 basis points over the quarter. About 40 per cent of large loans at variable rates were estimated to have risen 35 basis points over the past three months.

Small businesses were less affected, with about 50 per cent of loans worth less than $2 million increasing 25 basis points, in line with the August cash rate.

The statement said Australian banks had continued to lend normally throughout the credit meltdown caused by the US subprime crisis.