Banks on $25 billion gravy train

AUSTRALIA'S banks will reap an estimated $25 billion if they pass on only half of the expected 0.5 per cent interest rate cut.

Banks on $25 billion gravy train

AUSTRALIA'S banks will reap an estimated $25 billion if they pass on only half of the expected 0.5 per cent interest rate cut.

The Reserve Bank board is widely tipped to cut official interest rates by 50 basis points to 6.5 per cent tomorrow, giving variable rate loan holders an annual $49 billion interest saving.

Banks, however, are expected to use the occasion to claw back some of their lost margins.

This would mean homeowners and businesses on variable rate loans, who owe almost $1 trillion, are likely to be paying banks $2 billion more each month in interest than they would be if the whole interest rate cut was passed on.

Federal Treasurer Wayne Swan yesterday gave the banks room to move, saying short-term borrowing costs had "blown out'' in the past fortnight.

"On Friday, short-term borrowing costs were six times their normal level,'' he said.

"Earlier in the week, they were 10 times their normal level. So the situation today from a month ago is vastly more complicated and banks are facing much higher borrowing costs.''

Treasury analysis obtained by The Advertiser supports this, showing that since the September interest rate cut, there has been a significant rise in short-term funding costs.

But Mr Swan said banks would have "absolutely no excuse not to pass on their lower funding costs'' if global markets stabilised over time.

Reserve Bank Governor Glenn Stevens has reportedly agreed with the Government's position that it is in the best interests of the banking system to allow banks to retain funds, rather than pass them on fully through interest rate cuts.

Former Treasurer Peter Costello said banks were already making high profits and had been increasing their margins, ahead of the official rate.

"They've already taken 50 basis points, they're already in front, they're highly profitable, they're well capitalised,'' he said.

The banking sector is still battling an international credit crisis, which is not expected to ease with the passing of a $US700 billion ($907 billion) bailout package in the US on Saturday.

News of the deal is also not expected to settle local share markets, which closed 1.5 per cent down at 4702 points on Friday.

"It could be a quiet day, but it might also be quite a volatile day, because you don't have that buffer of liquidity,'' AMP Capital chief economist Shane Oliver said.

"A rate cut in Australia, particularly a 0.5 per cent rate cut, would be taken positively by the market, but then it also depends on what degree the banks pass it on.

"My feeling is they are going to pass half of it on."