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Expect more rate rises from banks: PIMCO

PIMCO Australia head of portfolio management Rob Mead said that even though Australia's double A-rated banks were perceived as among the world's strongest, their cost of borrowing in offshore markets would not be immune to changes in the risk appetite of global investors.

“Higher funding costs will be passed directly to domestic borrowers,” Mr Mead said in a statement on Wednesday.

Superannuation funds should be encouraged to provide more money to banks as an alternative funding route, he also said.

Mr Mead told AAP that the Reserve Bank of Australia (RBA) probably had just two more rate rises in sight.

“The RBA may increase rates again once or twice, but the top of the cycle will be much, much lower than it was last time because of these additional funding costs for the banks.”

Mr Mead's prediction of the need for out-of-cycle interest rate hikes by banks echo those of local funds managers and banking analysts. This includes UBS' Jonathan Mott, CLSA Asia Pacific's Brian Johnson, and Fat Prophets' chief executive Angus Geddes.

Europe's sovereign debt crisis has driven global wholesale term funding costs higher since April, making it more expensive for the big four banks to roll over $78 billion due for re-financing in the next 12 months, especially as they continue lengthening the maturity of each debt issue.

Tougher capital and liquidity reforms in 2011 will make this practice more expensive and banks would likely pass this cost on to borrowers, CLSA said.

Mr Geddes said the debt burdens of foreign governments had pushed sovereign debt risks and the cost of capital higher.

“The debt to GDP for the US means (its) interest payments in absolute terms are back to where it was in the 1980s. So there are potential dislocation issues if interest rates start going up,” Mr Geddes said.

Mr Geddes and Fat Prophets' financial services analyst Colin Whitehead said Australia's cash rate could touch 10 per cent in several years, driven by the effect of inflation as northern hemisphere governments continue to print money.

“But it will be a number of years in the making because the patient is still on life support and monetary tightening cannot occur until they rebuild the strength in the economies,” Mr Whitehead said.

“Governments will be forced to tighten just through inflationary pressures.”

Bond investors will demand more return via higher yields, he said.

However, Mr Mead said the long-term prospect of rising inflation offshore would not have a direct impact on Australia's interest rates.

“Eventually, and this could be five-plus years away, different parts of the world could face some increasing inflation.

“From the Australian point of view, that shouldn't have a direct impact here.”

PIMCO has $US1.1 trillion ($1.25 trillion) in assets under management, and on Tuesday said it had withdrawn funds from European debt in recent months and injected the money into the world's traditional safe haven, US treasuries.
SOURCE: aap