Big banks’ abysmal record on passing through rate cuts in focus as Reserve Bank board meets

The major banks are politically savvy enough to know if a rate cut is announced this week they must pass it on in full. But their track record on reductions is extremely poor.

Reserve Bank governor Michele Bullock will front the media on Tuesday after the central bank’s two-day monetary policy meeting. Picture: NewsWire/Jeremy Piper

The big banks are politically savvy enough to know if an official rate cut is given the green light this week they must pass it on in full to avoid any pile on. What happens after that, though, is a lot less clear.

Their track record of passing on rate cuts in their entirety to borrowers is extremely poor over the past decade, as banks have sought to tightly manage the impact on earnings through their net interest margins.

All eyes are on the Michele Bullock-led Reserve Bank this week and financial markets are anticipating an almost certain 25 basis points of easing.

It’s a headline-grabbing event on several fronts given this RBA meeting has a large bearing on when voters will go to the federal polls.

The Anthony Albanese Labor government will tactically seek to benefit from any sentiment boost and cost-of-living relief a rate cut delivers this month, or in the event the RBA waits, assess how to leverage the following rates decision on April 1.

With a federal election looming, and big businesses including supermarkets, insurers and banks still in the firing line, large companies won’t be rocking the boat in the near term.

The major banks are acutely aware they should avoid becoming political targets during an election campaign.

Already we’ve seen a string of concessions and a conciliatory tone from the banking sector, with this month’s extension to a moratorium on rural bank branch closures and new service agreements being struck between three major banks and Australia Post.

Even ANZ – which has not previously entered into a banking service deal with Australia Post – is at an “advanced stage” of securing an agreement, which would take effect from October. Macquarie Bank and HSBC have also committed to starting negotiations.

The sector’s concessions give the government enough bandwidth to make it appear they are keeping up the pressure, even as the proposed rural banking levy is put on ice.

The Treasury has been consulting on measures that would see payments being levied on banks with a smaller branch presence in rural and regional Australia.

Back to the rate cut analysis and the major banks’ lacklustre track record.

A review by financial comparison firm Canstar of the past decade looked at how many of the 10 rate cuts during that period the major banks had passed on either in full or partially.

It found Commonwealth Bank, ANZ and National Australia Bank had delivered borrowers just four of those 10 cuts in full, while Westpac fared even worse by passing on just two rate reductions in their entirety.

In February 2015, Westpac did deliver borrowers a rate cut of 28 basis points, which slightly exceeded the official decline by the RBA of 25 basis points.

To be fair, there are a range of factors that feed into the banks’ funding costs giving them some wiggle room on passing on all the RBA rate cuts in full.

Market reference rates, such as the bank bill swap rate, levels of deposit funding, market liquidity and term funding, all feed into overall funding costs.

But even so, the track record of our major lenders in this area is abysmal, which is also a function of their market dominance.

Canstar’s analysis showed that as official rates were cut to a record low of 0.10 in late 2020 as the pandemic gripped the economy, none of the big four banks passed on the 15 basis points cut by the RBA.

The 25 basis points reduction in rates prior to that saw just ANZ pass on 15 basis points of the 25 basis points cut, while the other three majors sat on their hands.

The August 2016 RBA cut of 25 basis points saw the big four banks pass on between 10 basis points (NAB) and 14 basis points (Westpac).

Canstar found banks typically passed on rate changes between 10 and 14 days after an RBA move.

It’s important to remember that this week’s mooted rate cut is not a done deal, even though inflationary pressures throughout the economy have subsided.

The jobs market and wages growth in Australia remain healthy and the RBA may want further evidence that inflation is under control.

An RBA research paper released in 2021, titled Monetary Policy, Equity Markets and the Information Effect, noted the depth of the central bank’s analysis given it had about 170 employees directly monitoring and forecasting economic and financial developments and implementing monetary policy decisions.

“This headcount is likely far more than any private sector organisation employs for monitoring the Australian economy. As a result, the RBA’s assessment of the economy could be of higher quality than any other individual organisation’s assessment,” the paper said.

The RBA also undertakes its business liaison program where it engages with a cross-section of the corporate community, where it has about 900 active contacts across Australia.

The central bank on average engages with between 70 and 80 business contacts a month. In February, the ability of the RBA to take the pulse of the business community is also aided by the ASX’s profit-reporting season.

CBA, the nation’s largest bank, last week delivered a better-than-expected first-half cash profit and flagged that most borrower customer cohorts had resumed saving given tax cuts and energy bill relief.

CBA’s chief executive Matt Comyn noted households were looking forward to an RBA rate cut and would be disappointed if it weren’t to occur.

“The RBA needs to be acting independently and (doing) what they determine to be the appropriate path,” he said.

“Notwithstanding the improvement, in the last quarterly CPI (consumer price index) data in particular was encouraging, it is obviously of critical importance that inflation gets into and remains in the target band.”

Originally published as Big banks’ abysmal record on passing through rate cuts in focus as Reserve Bank board meets