Passing on the full Reserve Bank of Australia interest rate cut will cost big retail banks nearly $100m

For once, the big banks are going to cop it in the neck over a rate cut. But they’ve got a little-known plan for reducing the pain they suffer.

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For the first time in five years, the big banks have passed on an official rate cut in full — a move that will lop nearly $100 million from their combined profits.

ANZ, CBA, NAB and Westpac yesterday stepped up to Prime Minister Scott Morrison’s challenge to do the “right thing” by totally transmitting the central bank’s reduction to home-loan rates.

“The government would absolutely expect the four big banks to come to the table and to do their bit in supporting Australians as we go through the impact of the coronavirus,” Mr Morrison said.

The PM defined doing the “right thing” as passing on all of the Reserve Bank of Australia rate drop.

Within minutes of the RBA lowering its benchmark cash rate to 0.5 per cent from 0.75 per cent at 2.30pm, the retail banks began to move. Within two hours, all four had said they would reduce their key mortgage rates by 0.25 per cent.

The Big Four didn’t dally after the RBA cut. Picture: AAP Image

“This is Scott Morrison’s work,” one bank analyst, who asked not to be named, said.

The Big Four’s break-even figure would have been to cut by just 0.21 per cent.

Going the whole hog will wipe about 3.6 per cent or $97 million from their annual earnings, sources said.

However, another source said the profit hit will be spread over three years through bond market “hedging”.

No bank said what it was doing with deposits.

Potentially, some could be slashed by more than 0.25 per cent to partially claw back some of their lending losses.

Still, they will have to take a further hit on some of their savings products, because more than a quarter of their deposits already have rates of less than 0.25 per cent, meaning the full cut can’t be applied.

RBA Governor Philip Lowe said it had acted to “provide additional support to employment and economic activity” and was “prepared to ease monetary policy further”.

Many economists expect that will happen as soon as its next meeting, in April.

Mr Morrison may step in before then.

“Treasury is working closely together with the other relevant agencies of government to address the boost that we believe will be necessary,” he said yesterday.

It is likely that boost will involve helping small and medium-sized businesses facing a temporary coronavirus-induced cash crunch. The aim would be to ensure staff aren’t laid off to get through a rough patch.

Labor’s Treasury spokesman Jim Chalmers said “Australians are crying out for economic leadership and an economic plan”.

Official GDP data will be published today and is expected to show economic growth of just 0.3 or 0.4 per cent in the final three months of 2019.

Westpac also reduced its small business loan rates by the same amount as the RBA.

“We recognise that COVID-19 will have a direct impact on our nation’s economy and we want to provide additional support to our small business and home loan customers at this unprecedented time,” said Westpac’s consumer banking chief David Lindberg.

Mr Morrison later said he was “pleased” by the bank responses.