WBCCD Westpac Banking Corporation

SYDNEY—Higher mortgage rates for millions of homeowners are shaking consumer confidence and raising the likelihood that Australia's central bank will cut rates before the end of the year to help stave off a recession.

The consumer squeeze stems from moves by commercial banks this month to raise lending rates to recover the cost of a new regulatory requirement to set aside more capital.

It comes as a sustained downturn in commodities prices is hurting Australia's economy along with those of other resource-rich countries such as Canada and Norway, where central banks are considering extra stimulus measures to ward off the danger of a sharp downturn.

They stand in contrast to the U.S. Federal Reserve, which is considering raising rates as the U.S. economy shows signs of recovery.

"Consumer confidence readings [in Australia] are now under close scrutiny, and any deterioration there will be the main channel for an interest-rate cut in coming months," said Michael Turner, a strategist at RBC Capital Markets in Sydney. "If the central bank starts feeling confidence has softened heading into Christmas, the probability of a December rate cut will rise."

In mid-October, Westpac Banking Corp. said it would increase its variable mortgage rate by 0.2 percentage point starting in November. Days later, Australia's three other big banks announced increases to their variable-rate mortgages, which are the type held by most Australians.

Shortly after, signs began to emerge that Australians were beginning to spend less freely. A survey last week by ANZ-Roy Morgan showed a 2% weekly drop in consumer sentiment. The latest survey, published on Tuesday, showed little improvement, with consumers expressing particular concern over their personal finances in the wake of the increases.

"The lift in mortgage rates over the past week is essentially a quasi-tightening on the economy," said Savanth Sebastian, an economist at CommSec brokerage. "A rate cut before Christmas would help to boost activity across the nation."

Economists generally expect the central bank to refer to the big lenders' moves in its monetary statement after it meets on Nov. 3. It is set to meet again on Dec. 1.

The central bank has held its cash-rate target at 2% since May as it strives to prevent the country from sliding into recession for the first time since 1991. Some economists have predicted a downturn as soon as this year amid plunging commodity prices linked to China's sharp slowdown.

Despite the low official interest rates, business and consumer confidence has remained fragile, and there are few signs nonmining sectors of the economy are taking up the slack from wilting investment in the resources industry.

Housing has been one of the few bright spots, with rising lending to home buyers helping to fuel a construction boom in cities such as Sydney and Melbourne.

The central bank has cited runaway house prices as a risk to the fragile economy because of the danger of a sudden collapse—leading it to support industry steps to curtail lending to property speculators.

But the broad mortgage-rate increases introduced last week are equally a concern, because of the harm they may do to consumer confidence longer term.

"Housing has been a key pillar of growth this year, and without that support we expect the economy will need further stimulus in the form of another" half a percentage point interest rate cut, said ANZ's co-head of Australian economics, Felicity Emmett, shortly after the mortgage-rate increases were announced.

The banks justified the increases by pointing to the rising cost of the new regulation, which aims to make the biggest lenders "unquestionably strong" and ensure they comply with the Basel III framework. It was designed to prevent a financial crisis of the sort triggered by the collapse of Lehman Brothers and the subsequent global credit crunch.

Robb M. Stewart in Melbourne contributed to this article.

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(END) Dow Jones Newswires

October 26, 2015 19:25 ET (23:25 GMT)

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