Pass on rate cut, Treasurer warns banks

Josh Frydenberg has issued a stern warning to the big banks ahead of today’s expected interest rate cut by the Reserve Bank.

Australians should have the full benefits of a likely cut to the official cash rate passed onto them, Treasurer Josh Frydenberg has warned bank bosses.

The Reserve Bank is widely expected to drop the rate to 1.25 per cent on Tuesday, in an effort to lift employment conditions and preserve its inflation target.

The rate, which reflects what the central bank charges commercial banks on overnight loans and influences the setting other interests rates, has sat at a record low of 1.5 per cent since August 2016.

Mr Frydenberg met with the CEOs of the four big banks in recent days to urge them to pass on the benefits of a lower rate, if it happens.

Borrowers with an average home loan of $400,000 would save about $58 on their monthly repayments if the cut was fully passed on.

The treasurer has also reminded the banks of the recent findings of the banking royal commission to underline his argument.

Treasurer Josh Frydenberg meets with Commonwealth Bank CEO Matt Comyn. Picture: Stuart McEvoy/The Australian

“The royal commission highlighted how the culture within financial institutions needed to improve ... and how the conduct had fallen below public expectations,” he told The Australian on Tuesday.

“My message to the banks is that, while they are critical pillars of the economy and especially at a time of domestic and international economic challenges, it was important to maintain the flow of credit to households and businesses.

“The public would rightly expect the benefit of any sustained reduction in funding costs are passed on in full.” But while the banks are under pressure to pass on any RBA cut in full, some experts are sceptical that they will, as the banks continue to look for ways to recover loss profit margins eroded by previously high funding costs.

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Shadow treasurer Jim Chalmers argues that if the federal government was doing such a good job of managing the economy the RBA wouldn’t be thinking about cutting rates.

“What that shows is that the economy is weak,” he says, pointing to recent data on wages, consumption and household savings.

The Reserve Bank is expected to cut interest rates to a new historic low. Picture: Saeed Khan/AFP

National accounts data — a measure of the strength of the economy — to be released on Wednesday is expected to show growth remained soft in the March quarter.

The market consensus forecast is for anaemic gross domestic product growth of 0.4 per cent in the quarter and 1.8 per cent annually.

Meanwhile, Westpac economist Matthew Hassan said a rate cut on Tuesday would give consumer confidence a short-term boost.

“A decent positive initial sentiment response looks likely but the more interesting aspect may be the extent to which a June rate cut and follow up moves in coming months generate a more sustained lift in housing related sentiment,” he said.

Originally published as Pass on rate cut, Treasurer warns banks