Rate hikes 'hard to justify': RBA

The Reserve Bank of Australia has challenged bank rate hikes by pointing out that profits from lending have returned to pre-crisis levels.

According to the Sydney Morning Herald (SMH), RBA governor Ric Battellino stated that the difference between interest rates charged to customers and funding costs - or the net interest margins - are now 20 bps above pre-crisis levels.

"With the economy and business climate now improving, the economic justification for wider margins on loans is becoming less compelling, so it would be reasonable to assume that, in a competitive banking sector, we should see margins level out soon," said Battellino at the Australiasian Finance and Banking Conference in Sydney.

Meanwhile Westpac's chairman Ted Evans defended the bank's rate rise of 45 bps above the RBA's December hike, insisting it was time for homeowners to bear some of the cost of funding.

Evans told members of the bank's annual meeting in Melbourne yesterday that it was not fair for small business owners to bear the brunt of rate increases in order than home loans could be subsidised. Chief executive Gail Kelly indicated that interest rates will move even higher next year.