The soaring funding costs will compel banks to raise interest rates.

As ballooning funding costs continue to plague lenders, particularly the big four banks, they are expected to pass the burden to borrowers with rate hikes.

Citing an analysis by Citi, the Australian Financial Review (AFR) said major lenders are increasingly finding it hard to afford the skyrocketing costs of their residential loan books, which account for 55% of their total lending portfolios.

Citi said short-term bank funding costs have jumped to roughly 60 basis points, increasing funding of mortgage portfolios. This is around three times higher than historical averages.

The sudden rate increases will average roughly 8 basis points across all mortgage products. However, interest-only offerings are expected to bear higher rates.

Citi predicts the National Australia Bank, the Commonwealth Bank, the Australia and New Zealand Banking Group, and Westpac will all raise interest rates before the end of their financial years.

"We expect the major banks will tread carefully and aim to balance the competitive and regulatory pressures by repricing 8 basis points on average across mortgage portfolios by September. Further repricing will likely be required in 2019 should the spike sustain," Citi said, as quoted by the AFR.

Other lenders including the Bank of Queensland, IMB, Auswide bank, Suncorp, ME Bank, Heritage Bank, and ING have already introduced higher interest rates due to funding costs.

"Despite no increase in the official cash rate, we’ve had to make this difficult decision due to a sustained increase in 30 and 90-day BBSW levels. We are now paying significantly more for funding than we were 6 months ago which this increase will help offset," Auswide managing director Martin Barrett said.

These rate hikes came as the Reserve Bank of Australia (RBA) decided to hold the historically-low interest rate at 1.5% for 21 consecutive months. The central bank believes that the Australian economy still benefits from the low-interest rate environment.


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