Why are ASX 200 bank shares responding positively to higher interest rates?

Bank shares have caught a bid today as the RBA continues its tightening policy.

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Key points

  • ASX bank shares have rallied on Wednesday following the RBA's rate hike overnight 
  • The sector has caught a bid today as several banks passed the hike immediately onto their products 
  • The official cash rate is now at 1.35%, its highest in many years 

Australian markets are rangebound today with tech and financial leading into afternoon trade.

ASX 200 bank shares have been net-winners today, following news that the Reserve Bank (RBA) hiked the cash rate by 50 basis points to 1.35% on Tuesday.

Investors have rallied the sector amid speculation the hikes may be passed immediately through to consumers.

In broad market moves, the S&P/ASX 200 Index (ASX: XJO) is rangebound today.

Tackling macroeconomic worries

The rate increases are also hoped to compress the level of inflation, a common theme currently plaguing equity markets.

“Global inflation is high,” the RBA said.

“Monetary policy globally is responding to this higher inflation, although it will be some time yet before inflation returns to target in most countries,” it added.

The size and timing of future interest rate increases will be guided by the incoming data and the Board’s assessment of the outlook for inflation and the labour market. The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.

ASX 200 bank shares rise amid rate hikes

In an effort to uphold net interest income (NII) and net interest margins (NIMs), the big Australian banks have folded the cash rate hikes into their lending rates.

It wasn’t long after the RBA’s decision that the Commonwealth Bank of Australia (ASX: CBA) passed on the full 50 basis point increase to its standard variable mortgage rates.

Macquarie Group Ltd (ASX: MQG) and Australia New Zealand Banking Group Ltd (ASX: ANZ) each passed through the 0.5% raise as well.

CBA, Macquarie and ANZ are each up around 1% on the day at the time of writing.

However, CBA and Macquarie have also passed on rate increases to their deposit rates. For example, CBA also fed the 50 basis point jump through to its GoalSaver and YouthSaver accounts.

ANZ also followed suit and now offers a 2.5% rate of interest on an “advance notice” term deposit with an 11-month maturity.

As a result of the shift in rates, investors have rallied ASX bank shares amid speculation the interest rate rises could be a net positive to NII and NIMs.

Should that be the case, it would address the NIM issue that’s been festering amongst ASX bank shares for some time.

Motley Fool contributor Zach Bristow has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Macquarie Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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