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Banks likely to withhold rate cut

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Wednesday, 01 February 2012

Jessica Darnbrough

While industry stakeholders remain at odds over whether or not the Reserve Bank of Australia will drop the cash rate when the Board meets next week, it is becoming increasingly unlikely that Australia's banks will pass on any rate cut in full.

Speaking to The Adviser, AFG's NSW/ACT state manager Chris Slater said the banks have gone to great lengths to forewarn borrowers and brokers that any rate cuts delivered by the RBA may be withheld.

At the end of last year, ANZ's chief executive Australia Phil Chronican said the bank's funding costs were now "largely unrelated" to movements in the Reserve Bank's official cash rate.

As a result, the lender decided to align its mortgage rates more closely with its funding costs and review its rates on the second Friday of each month – independently of the RBA.

Less than one week later, Westpac's chief executive Gail Kelly told press that the lender had decided to follow ANZ's suit and review its mortgage rates independently of the Reserve Bank.

"We are probably going to see the RBA drop the rates. But, the big question will be whether or not the banks pass on the rate cut in full and I don't think they will," Chris Slater said

" First home buyers would really benefit from another 25 basis point rate cut, but I do not think we will see the rate cut passed on in full."

RP Data's senior research analyst Cameron Kusher agreed and said if the banks withhold some or all of the rate cut, it would really hurt the level of housing activity.

"Given the weak housing numbers we saw this month, I think there is a good chance we will see another rate cut in February. But, will it be passed on? I don't necessarily think that will be the case, which will ultimately limit the amount of people coming back into the housing market," he told The Adviser.

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0 #4 Graham Couper-Smith 2012-02-02 07:45
The banks funding costs have already gone up. Note the extra margins paid in January by CBA and ANZ. Mortgage rates will rise without an RBA offset.

I'm not worried about Steve's concern. Price competition is already so intense that if one bank gets it wrong and adjusts too much, their competitors will rub their hands with glee.

Without the RBA's action to drop rates, I expect rising variable rates and more fixed rate discounting as the bank's long term return isn't affected as badly (much like a landlord offering a period of low rent as an incitement to a new tenant.
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+2 #3 Damien 2012-02-01 16:56
Very well said Steve, a pity this moronic government isn't capable of finding a solution to what is going to become a major , major issue.
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+1 #2 George Christie 2012-02-01 11:14
If the banks want to be believed on the issue of funding costs, they need to be transparent to the public. Failure to pass on an RBA reduction citing funding costs makes no sense to the average borrower. If the cost of funds goes up due to a deteriorating situation in Europe, Banks can raise rates then. Distancing themselves from the RBA rate will be remembered should the Banks increase rates in response to a future RBA increase
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-3 #1 Steve McClure 2012-02-01 09:42
It seems like the lenders are suggesting that if the RBA is worried about reducing rates too low, it's OK, because the banks won't pass it all on anyway. An RBA rate cut would therefore increase the lenders profits amidst falling rates. That's not the RBA's role.

Shouldn't the RBA be saying, "If you need to increase your margins, do it, and THEN we will decide whether rates need to be cut"? This would test whether lenders have an agenda or bluffing, and just how keen they are to keep their rates competitive. It is not for the RBA to be making interest rate decisions in anticipation of lenders decisions. It circumvents market forces and is anti-competitive.
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