Banks are refusing to pass on the RBA’s interest rate cut in full - Cbl media
The big banks are refusing to pass on the RBA’s interest rate cut in full – and the government isn’t happy about it

The big banks are refusing to pass on the RBA’s interest rate cut in full – and the government isn’t happy about it

Banks are refusing to pass on the RBA’s interest rate cut in full

The big banks are refusing to pass on the RBA’s interest rate cut in full – and the government isn’t happy about it

  • The RBA cut the official cash rate to 0.75% on Tuesday, a new historical low for Australia.
  • The big four banks however appeared reluctant to pass on the cut in full to customers, with the Commonwealth Bank and NAB cutting most of their standard variable rates by 0.13% and 0.15% respectively.
  • ANZ and Westpac have made no move so far, frustrating Treasurer Josh Frydenberg and the RBA, which is trying to do what it can to stimulate the economy.

You can lead a banker to a lower interest rate, but you can’t make them cut.

That’s the eternal dilemma of the Reserve Bank of Australia (RBA), and one that is becoming a serious problem as the latest cut on Tuesday pulls Australia closer and closer to 0%. After it moved to slash the interest rate to 0.75% at its October meeting, all eyes turned to the banks to follow its lead.

“It is the Government’s expectation that the banks will pass on this twenty-five basis point rate cut in full,” Treasurer Josh Frydenberg told the media following the RBA’s Tuesday cut.

That ‘expectation’ however always looked unlikely to match up with reality. Of the big four banks, only the Commonwealth Bank (CBA) and the NAB have so far announced they would adjust their rates at all – but neither was really passing on the cut in full.

The majority of CBA customers with standard variable loan rates will receive just a 0.13% reduction. The exception being the still-higher rate on investor interest-only home loan. They will be reduced by the full 0.25% cut.

Similarly over at NAB, customers will receive a 0.15% cut to its standard variable rates. Like CBA, its investor-only interest rates will be slashed by twice that, 0.30%.

ANZ and Westpac meanwhile had not made a squeak about the rate cut at the time of publication. If the four were to pass on full cuts, it would have put hundreds of dollars back into the pockets of mortgagors.

“What [a 0.25% cut] means for an Australian family with a mortgage of $400,000 is $720 less a year in interest payments. That’s a significant benefit to an Australian family,” Frydenberg said.

The banks’ refusal to pass that on not only frustrates customers but also helps mute the impact of the cuts in the first place.

“The Reserve Bank Governor, only a week ago, made a speech where he said it would be unhelpful for the bank to ignore these global movements downwards in interest rates because it would make it obviously more difficult to meet their objectives of the inflation target as well as full employment,” Frydneberg said.

MONEY & MARKETS
The big banks are refusing to pass on the RBA’s interest rate cut in full – and the government isn’t happy about it

JACK DERWIN
OCT 2, 2019
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The RBA is up against it. (Photo by David Rogers, Getty Images)
The RBA cut the official cash rate to 0.75% on Tuesday, a new historical low for Australia.
The big four banks however appeared reluctant to pass on the cut in full to customers, with the Commonwealth Bank and NAB cutting most of their standard variable rates by 0.13% and 0.15% respectively.
ANZ and Westpac have made no move so far, frustrating Treasurer Josh Frydenberg and the RBA, which is trying to do what it can to stimulate the economy.
You can lead a banker to a lower interest rate, but you can’t make them cut.

That’s the eternal dilemma of the Reserve Bank of Australia (RBA), and one that is becoming a serious problem as the latest cut on Tuesday pulls Australia closer and closer to 0%. After it moved to slash the interest rate to 0.75% at its October meeting, all eyes turned to the banks to follow its lead.

“It is the Government’s expectation that the banks will pass on this twenty-five basis point rate cut in full,” Treasurer Josh Frydenberg told the media following the RBA’s Tuesday cut.

That ‘expectation’ however always looked unlikely to match up with reality. Of the big four banks, only the Commonwealth Bank (CBA) and the NAB have so far announced they would adjust their rates at all – but neither was really passing on the cut in full.

The majority of CBA customers with standard variable loan rates will receive just a 0.13% reduction. The exception being the still-higher rate on investor interest-only home loan. They will be reduced by the full 0.25% cut.

Similarly over at NAB, customers will receive a 0.15% cut to its standard variable rates. Like CBA, its investor-only interest rates will be slashed by twice that, 0.30%.

ANZ and Westpac meanwhile had not made a squeak about the rate cut at the time of publication. If the four were to pass on full cuts, it would have put hundreds of dollars back into the pockets of mortgagors.

“What [a 0.25% cut] means for an Australian family with a mortgage of $400,000 is $720 less a year in interest payments. That’s a significant benefit to an Australian family,” Frydenberg said.

The banks’ refusal to pass that on not only frustrates customers but also helps mute the impact of the cuts in the first place.

“The Reserve Bank Governor, only a week ago, made a speech where he said it would be unhelpful for the bank to ignore these global movements downwards in interest rates because it would make it obviously more difficult to meet their objectives of the inflation target as well as full employment,” Frydneberg said.

The banks, however, have less room to move as interest rates continue to fall. The interest rates they offer on deposits cannot go much lower, and thus the ones they charge on loans are also approaching a limit. To cut beyond a point would begin cutting into the — admittedly very healthy — profit margins of the banks.

On the other side of the equation, by only passing on around half the 0.25% interest rate cut, Australians are left with half the extra money they could be. That, in turn, restricts spending, reducing stimulus to the economy which is the overall point of cutting rates in the first place.

RBA governor Philip Lowe has previously admitted that more rate cuts will do little to help the economy. If cuts aren’t even passed on in full that is doubly the case, especially considering spending is already under strain.

ALSO READ: THE RBA HAS JUST SLASHED THE INTEREST RATE AGAIN AS THE AUSTRALIAN ECONOMY WEAKENS

“Quite simply, the economy requires more stimulus. Ideally, the federal government would rise to the occasion. Fiscal policy can be better targeted in the current environment and could stimulate the economy without pushing house prices and debt higher,” Indeed Asia-Pacific economist Callam Pickering said in a note issued to Business Insider Australia.

Frydenberg, however, has previously signalled that government spending – a type of fiscal stimulus – is all but off the table unless the Australian economy was to worsen significantly.

“Unfortunately, a budget surplus has been placed ahead of jobs and growth. The RBA will have to make do with their imperfect policy tool,” Pickering said.

That means most economists expect another cut in February by the RBA, even if no one else follows its lead.

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