Banks keeping RBA rate cuts stifling economic boost

Banks have been keeping more of RBA cuts, so a new cut is likely to still leave homeowners ‘short-changed’ and blunt any economic boost.

Some banks are also opting to pass on the full rates through low introductory offers in an attempt to lure new customers, rather than slashing rates for their existing customers. 

Banks have been keeping more of RBA cuts, so a new cut is likely to still leave homeowners “short-changed” and blunt any economic boost, according to comparison website RateCity.

The big four banks might pass on as little as half of Tuesday’s prospective interest rate cut to consumers, potentially stifling the central bank’s monetary easing attempts, it said.

Market analysts are expecting a 25 basis point cut on Tuesday after the Reserve Bank of Australia (RBA) board meeting, as the Australian economy absorbs the effects of events such as the bushfire season and the coronavirus outbreak.

Data obtained from comparison website RateCity highlights the growing interest rate fatigue by the big four banks. In the past three cash rate cuts, less and less was passed on each time to customers. 

Across the previous year’s cuts in June, July and October, the average rate passed on by the four major banks went from 0.22 per cent in June, 0.21 per cent in July and 0.14 per cent in October. 

The RBA and the federal government has made it clear that retail banks should be passing on cash rate cuts in full. 

However, RateCity research director Sally Tindall said the low-rate environment was “problematic” for funding decisions that were not entirely based on cash rate movements. 

“Banks also consider the cost of wholesale funding, competition in the market, operational costs and most recently, an inability to pass on a full cut to deposit accounts that are already bordering on zero,” Ms Tindall said. 

“In this low rate environment, cuts to the cash rate, which are designed to stimulate the economy, are now leaving homeowners feeling short-changed.”

UBS said the market is fully pricing in a 25 basis point cut following Tuesday’s RBA meeting, with analysts predicting banks will be under pressure to pass on this prospective cut in full.

The brokerage has moved its rating to “under review” for Australian banks, as the RBA overnight index swaps opened on Monday at just 0.15 per cent by August.

Retail banks are expected to pass on a portion of the cut within the next one to two weeks, with the housing market expected to respond positively to a cut.

A further rate slash to 0.25 per cent would need to be supported by quantitative easing for banks to pass on the effect, says UBS.

Some banks are also opting to pass on the full rates through low introductory offers in an attempt to lure new customers, rather than slashing rates for their existing customers. 

RateCity said the RBA last month indicated the average existing customer rates were 0.41 per cent worse off than new owner occupier rates.

“If customers don’t feel like they are getting value for money on their home loan then they can vote with their feet and move to a more competitive lender,” Ms Tindall said. 

ANZ last month cut its two-year fixed home loan rate to 2.68 per cent, while its variable rate sits at 3.12 per cent. 

NAB is currently offering the lowest variable rate out of the big four at 3.09 per cent, while Westpac and Commonwealth Bank are offering 3.18 per cent and 3.22 per cent respectively. 

Online lenders continue to offer some of the lowest variable rates, with lenders Tic Toc offering 2.79 per cent and Reduce Home Loans offering 2.69 per cent.

“Banks big and small are offering rock-bottom rates to home loan customers who have a good track record and are willing to switch lenders,” Ms Tindall said. 

“Even the big four banks have started playing ball in the low rate space, particularly with their fixed rates, in a bid to get new customers on to their books.”