Australia cbank keeps close eye on mortgage rates

SYDNEY, March 30 (Reuters) - Australia's central bank takes higher mortgage rates into account when setting policy, a top centrofficial said on Tuesday, noting that widespread discounting meant home loan rates had not risen by as much as bank funding costs.

Reserve Bank of Australia (RBA) Assistant Governor Guy Debelle estimated bank funding costs since the global financial crisis had risen by between 130 and 140 basis points relative to the official cash rate.

But because of widespread discounting on new home loans, average variable mortgage rates had risen by around 110 basis points.

'Interestingly, while the standard variable rate has been increased, there is little sign of any reduction in the discounts offered on new loans,' said Debelle.

'While interest rates on mortgages have increased relative to the cash rate, the Reserve Bank is able to take account of those changes in its policy deliberations,' he added.

'The cash rate determined by the Reserve Bank is still the major determinant of the interest rate structure in Australia, including that of mortgage rates.'

The central bank has lifted its cash rate by 100 basis points to 4.0 percent since October and flagged further increases toward a more 'normal' setting.

RBA officials have emphasised that because effective rates paid across the economy are higher than in the past, the normal setting for the cash rate is lower than it would otherwise be.

RBA Governor Glenn Stevens recently identified a range of 4.25 to 4.75 percent as being roughly normal.

Just Monday he took the unusual step of granting a television interview in which he foreshadowed further hikes and cautioned against chasing home prices higher.

That led the market to narrow the odds for a rate increase at its next policy meeting on April 6. The implied probability of a hike to 4.25 percent was now at 72 percent, up from 50 percent last week and 25 percent early in the month.

In Tuesday's speech Debelle, who heads the RBA's financial markets division, said there were signs the market for securitised mortgages was coming back to life, which would help smaller lenders compete with the big banks.

'Already, the improvement in securitisation has encouraged some of the smaller lenders back into the market and encouraged some brokers to again look to increase their own mortgage lending,' said Debelle.

'With these developments, the provision of mortgage credit in Australia is likely to continue to be adequate in a competitive marketplace,' he added.

There have been concerns the major banks in Australia were monopolising mortgage lending, so widening margins.

Debelle also noted mortgage debt in Australia had proved much safer than in the United States or UK and that banks were still tightening lending standards for home loans.

The share of non-performing housing loans in Australia was very low at 0.6 percent, compared with 2.5 to 3 percent in the UK and 8 percent in the U.S.

Several banks had cut their loan to value ratios on prime, full-doc loans for new borrowers to about 90 percent, from 95-97 percent. Low-doc and non-conforming loans had become much harder to obtain and almost none were being written right now.

This has seen a decline in the share of new owner-occupier housing loans with a LVR above 90 per cent, from a peak of 27 percent in early 2009 to 17 percent by the end of the year. The share of low-doc loans declined to about 7 percent.

(Reporting by Wayne Cole; Editing by Balazs Koranyi) (If you have a query or comment on this story, send an email to [e-mail]) Keywords: AUSTRALIA ECONOMY/ ([e-mail] ; [phone]; Reuters Messaging: [e-mail]) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.