ANZ to break bonds with cash rate

Yesterday ANZ was the first of the big banks to show its hand after a two day standoff, announcing that it would pass on the full 25 basis points, but the move came with a caveat.

ANZ CEO Australia Philip Chronican said that in the face of the European economic and banking crisis the bank’s decision on the size of the interest rate change has been “one of the most difficult we have made in recent times”.

Retail banking margins have been contracting as the cost of funds has progressively risen over the last six months and this has made the relationship between the cash rate and mortgage rates less relevant than they were pre GFC.

In the future ANZ will now align the pricing of its loan products more closely with its funding costs.

“Bank funding costs are now largely unrelated to movements in the Reserve Bank’s official cash rate,” Mr Chronican said.

“We have therefore taken a decision to announce future pricing changes for retail and small business variable interest rates on the second Friday of each month.

“This provides a measure of predictability for customers on when rate changes will occur and it provides us with the flexibility to reflect movements in funding costs across the full spectrum of funding sources – not solely in response to the Reserve Bank’s cash rate,” Mr Chronican said.

“We know many people in the community are doing it tough at the moment and, on this occasion, we felt that a decision to reduce interest rates by 0.25 per cent pa for home borrowers and for small business was the right one in the circumstances.

“The significance of the crisis in Europe however has real consequences for the global economic outlook, for the Australian economy and for bank funding costs,” he said.