Swan pleads with banks on rates, again

Financial markets and economists are divided on whether the Reserve Bank will raise rates when it meets again on Tuesday.

Still, it has become a monthly ritual for the government to plead with the big banks not to raise rates beyond moves in the cash rate.

Shadow treasurer Joe Hockey last week noted that Mr Swan had issued 32 warnings to Australia's major lenders.

Sticking to script, Mr Swan asked the banks again today to play fair.

"Last week, we again saw the major banks report very healthy profits, so there's no justification for any of the banks to raise rates beyond official rates on Tuesday," the treasurer said in an economic note.

The banks have refuted suggestions from the Reserve Bank that funding costs had returned to where they were before the onset of the global financial crisis (GFC).

This means they could still raise lending levels above changes in the cash rate.

National Australia Bank chief executive Cameron Clyne said banks still faced higher costs for rollover products, a source of bank funding.

"Yes, marginal costs are down but we're rolling funding from pre-GFC levels to a much higher post-GFC level, so that means the average cost of the book is in fact rising," he told Sky News Business.

Most economists are expecting the central bank to keep rates on hold at 4.5 per cent on November 2, which is also Melbourne Cup Day.

Westpac chief economist Bill Evans see rates staying on hold until February 2011.

But the experts at ANZ are taking a different view, noting that annual inflation growth of 2.8 per cent was still at the upper end of the central bank's two to three per cent target.

"This latest inflation result means the RBA faces another finely balanced decision this month, after its surprise decision to keep rates on hold in October," they said in a note to clients.

"We retain our view that the RBA will lift the cash rate by 25 basis points next week."

A quarter of a percentage point rate rise would push up monthly repayments on a $500,000 mortgage by $85, assuming that banks don't raise their lending rates beyond that level.

Borrowers will be given a snapshot of home affordability tomorrow when official capital city house prices data for September is released.

Australian Bureau of Statistics retail trade figures for the month, due out on Thursday, will give economists another measure of Australia's economic recovery.

But Commonwealth Securities says Treasury and the Reserve Bank's assumptions about an economic recovery may be too optimistic.

The underlying budget deficit hit a record high of $63.3 billion in the year to September 2010, which would make reducing the deficit to $40.8 billion by mid-2011 a big task, chief economist Craig James said.