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Pundits fear banks won’t play ball if RBA cuts

by Charbel Kadib6 minute read
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Most industry pundits are expecting the RBA to cut the official cash rate later today. However, some observers have questioned whether banks will pass on savings to existing borrowers.  

According to an analysis from rate comparison website Canstar, 34 lenders dropped their mortgage rates in May, which amounted to 495 total rate changes.

The analysis found that 90 per cent (449) of the changes were reductions to fixed home loan rates, compared to 10 per cent (46) of changes which applied to variable home loans.

Canstar’s finance analyst, Steve Mickenbecker, noted that while recent rate changes have eased the mortgage burden for new customers, existing borrowers would need to wait for a monetary policy adjustment from the Reserve Bank of Australia (RBA) for rate relief.

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“Rate cuts for new home loans are coming left, right and centre as wholesale funding costs have declined with 34 lenders moving rates down just last month,” he said.

“The problem is that until the Reserve Bank moves the cash rate and lenders pass on the savings to existing borrowers, relief to the economy will be limited.

“The economy is reliant on the almost 6 million existing home loan borrowers getting some rate reprieve to kickstart consumer spending.”

Most pundits are expecting the RBA to make a monetary policy adjustment for the first time in almost three years, when its monetary policy board meets later today.

Finder.com.au’s RBA Cash Rate Survey has reported that of the 35 market analysts and economists surveyed, 32 (91 per cent) expect the RBA to cut the official cash rate.

All respondents that predicted a cut have forecast a 25bps decrease, which would bring the cash rate to a new record low of 1.25 per cent.

The shift in expectations follows RBA governor Philip Lowe’s concession that the board would “consider the case” for a rate cut in June, in light of flat inflation growth, subdued wage growth, and weaker than expected labour market conditions.

However, Finder’s insights manager, Graham Cooke, said that some banks may be reluctant to pass on savings to mortgage holders.

“A falling cash rate does generally lead to cheaper repayments for existing borrowers,” he said.

“That said, if the RBA cuts by 25 basis points, this doesn’t necessarily mean banks will pass on the rate cut in full. 

“Just three of the four big banks passed on the full cut last time around – and waited up to 20 days to do so – therefore borrowers should brace themselves and put matters into their own hands.”

Mr Cooke pointed to research from Finder, which found that the average variable home loan rate has responded to movements in the cash rate on 92 per cent of occasions since 1990, compared to the average online savings account rate, which reflected cash rate changes on 99 per cent of occasions.

“In other words, banks may be quicker to shave the interest off your savings than they are to take it off your home loan,” Mr Cooke added.

Research director at RateCity, Sally Tindall, added that lenders may be dissuaded from passing on rate cuts in full as they look to recover losses incurred from weaker credit growth.

“Banks have been hiking rates since 2017 due to the high cost of funding, but this pressure has dissipated, so the next RBA cut should, in theory, be passed on in full,” she said.

“That said, it’s been a tough year for the banks in a slowing home loan market, so some lenders may choose to hold part of the cut back.”  

However, CEO of InfoChoice Vadim Taube said he believes banks will have no choice but to move in tandem with the RBA in fear of a public backlash.  

“The big banks are sometimes slow to pass RBA rate cuts onto borrowers, but following the Hayne royal commission and recent strong words from the Treasurer Josh Frydenberg, we expect all four big banks to quickly fall into line with the RBA’s rate movements.”

“We expect all the banks and other lenders to pass through any RBA rate cut in full.”

The RBA’s much-anticipated decision will be announced at 2:30pm.  

[Related: Home loan rate cuts continue]

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Charbel Kadib

Charbel Kadib

AUTHOR

Charbel Kadib is the news editor on The Adviser and Mortgage Business.

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