CBA, NAB fail to pass full rate cut on most loans

Commonwealth Bank and National Australia Bank have resisted the government's pressure for banks to pass on in full the latest cut in official interest rates, pointing to the low rates on deposits as they reduced rates for most groups of borrowers by significantly less than the official 0.25 percentage point move.

CBA, the country's biggest bank, on Tuesday said it would lower rates by 0.13 percentage points for all owner-occupiers and for property investors who are paying principal and interest on their loans. Property investors with interest-only loans will receive the full 0.25 percentage point rate cut.

CBA will pass on 0.13 percentage points of the latest rate cut to most groups of customers.Credit: Michael Clayton-Jones

NAB followed CBA by saying it would cut rates for owner-occupiers and investors paying principal and interest by 0.15 percentage points. It will cut rates on interest-only loans for investors by 0.3 percentage points.

Westpac and ANZ Bank had not announced their response to the RBA at the time of writing.

CBA's group executive for retail banking, Angus Sullivan, pointed to the crunch on bank profit margins by saying it was "not feasible" to also pass on the full rate cut to more than $160 billion in deposits, as these accounts were already paying zero interest, or close to it. He said the bank would cut the base rate on its NetBank Saver account by 0.05 percentage points.

“As the Reserve Bank cash rate has reached record lows, we face a difficult balancing act between the multiple, valid interests of our stakeholders," Mr Sullivan said.

NAB's chief customer officer for consumer banking, Mike Baird, also acknowledged the decline in deposit rates.

“While these changes further support our 930,000 home loan customers, we are aware of the growing impact reductions in interest rates have on our three million savings and investment customers and will continue to offer competitive interest rates on savings and term deposits," Mr Baird said.

CBA's changes will take effect from October 22, while NAB's take effect on October 11.

RBA governor Philip Lowe on Tuesday did not rule out further interest rate cuts.Credit: Andrew Messenger

Earlier on Tuesday, Reserve Bank governor Philip Lowe announced a cut in official interest rates to a new record low of just 0.75 per cent, citing "spare capacity" in the economy and the global trend towards very low interest rates.

Following the RBA's move, Treasurer Josh Frydenberg said: "It is the government's expectation that the banks will pass on this 25 basis point rate cut in full."

The banks' decisions to withhold some of the cut in official borrowing costs had been predicted by analysts, who said profit margins were being crunched as lenders have struggled to offset falls in lending rates by cutting rates on deposits.

Major banks delayed responding to the RBA in the hours immediately following the decision, as the rivals played a game of chicken over who would risk the negative publicity of being the first lender to withhold some of the reduction in official rates.

Economists are expecting more cuts from the central bank, after the RBA's statement said a period of low rates would be needed to achieve "full employment," which experts said was a higher bar than its previous goal of "reducing unemployment".

CBA shares closed 0.6 per cent higher at $81.28, Westpac shares rose 0.2 per cent to $29.70, NAB was unchanged at $29.70, and ANZ Bank shares fell 0.1 per cent to $28.49.

Several business groups including the Australian Chamber of Commerce and Industry and the Housing Industry Association urged banks to pass on the cut in full to borrowers in order to ensure the easing in policy had the best chance of lifting economic growth.

Housing Industry Association senior economist Geordan Murray said the recent rises in house prices had not yet translated into higher demand for new homes, but rate cuts could help.

“If passed on, the rate cut will be great news for home buyers, particularly first home buyers pursuing their home ownership aspirations," Mr Murray said.

“If the rate cut is passed on to business customers it will go a long way to supporting those businesses in the residential building industry enduring challenging trading conditions."