Big banks defy RBA over rate cut

The big banks have passed on barely half of yesterday’s rate cut to their home mortgage and business borrowers.

The big banks have defied the ­Reserve Bank, passing on barely half of yesterday’s cut in the official benchmark cash rate to their home mortgage and business borrowers, reducing the stimulus that the central bank was trying to ­inject into the economy in favour of supporting their own profits.

The Reserve Bank has lowered the official rate at which it supplies cash to banks by 25 basis points to a record low 1.5 per cent — half the rate described by then-treasurer Wayne Swan as being an “emergency” level during the 2008-09 global financial crisis.

The RBA moved amid worries that there was too much idle ­capacity in business and the labour market, leading to very low inflation and the weakest wage growth on record.

“Given very subdued growth in labour costs and very low cost pressures elsewhere in the world, this is expected to remain the case for some time,” bank governor Glenn Stevens said after yesterday’s meeting.

“The board judged prospects for sustainable growth in the economy, with inflation returning to target over time, would be ­improved by easing monetary ­policy.”

However, the major banks, led by the Commonwealth, cut their mortgage rates by only between 10 and 14 basis points.

To offset the decision to hold back part of the RBA’s cut, the banks pledged to increase a range of term deposit rates for savers by as much as 55 basis points, pushing one-year deals as high as 3 per cent. However, some of the benefit of the rate cut will be passed on to shareholders in increased profit.

With mortgage loans totalling $1.5 trillion, passing on the full 25-basis-point rate cut would have translated to about a $3.7 billion benefit to home buyers. With banks holding back about half of this, it is not clear how the rest is being split between depositors and boosting bank profits.

“Given increased funding costs and capital requirements, today’s announced changes seek to balance the needs of customers and shareholders,” said Matt Comyn, the boss of CBA’s retail bank, the group’s largest division.

Scott Morrison said it was up to the banks to explain their response to the Reserve Bank rate cut.

“There’s certainly no argument for banks not to pass on rates on the basis of their cost of funds overseas at the moment,” the Treasurer said.

However, he noted that their decision to lift deposit rates was calculated to improve their own domestic sources of funds and ­reduce their reliance on global markets. “It’s not often when you get a cut in the cash rate that depositors actually get a bit of good news. It’s usually the opposite to that,” he said.

The banks are experiencing growing margins pressures from heightened lending competition at a time of slowing credit growth, plus regulations that are forcing them to strengthen capital levels and hold more deposits.

Falling official rates also hurt bank margins by eating into profits from their deposit books and equity holdings.

Labor Treasury spokesman Chris Bowen said Mr Morrison should be ensuring the banks passed the rate cut on to borrowers in full: “He has previously talked a tough game, beaten his chest, said he would insist that banks fully pass on interest rate cuts. It has been good enough for Scott Morrison to do that in the past — he needs to say what he’ll be doing about this matter now.”

Commonwealth Bank, the nat­ion’s largest home loan lender, was the first to move, passing on 13 basis points to homeowners, effective from August 19. NAB then held back a larger portion by cutting only 10 basis points. Westpac and ANZ passed on 14 basis points and 12 basis points respectively.

The moves gave CBA the new cheapest advertised variable mortgage rate of the major banks for owner-occupiers at 5.22 per cent, followed by NAB and ANZ at 5.25 per cent and Westpac at 5.29 per cent.

On a $350,000 mortgage for 25 years, CBA borrowers will save $26.89 a month compared with $51.56 if the bank had passed on the RBA’s cut in full, according to Canstar. NAB customers will save just $21 a month.

Since last year, property investors pay more for mortgages but will benefit from the same amount of reductions. Business borrowers will also see their loans, which vary based on multiple product types, fall by between 10 and 13 basis points.

Australian Chamber of Commerce and Industry chief executive James Pearson said: “I’d urge the banks to pass on as much of the rate cut as they can afford to small business; because that will stimulate investment and that leads to the creation of more jobs.”

Mr Pearson noted that the rate cut left the Reserve Bank with ­little room to move if the economy faced a downturn.

“The Reserve Bank is running down its ammunition, and action on monetary policy is no substitute for fundamental economic reform,” he said, calling on parliament to support the company tax cuts.

The Reserve appears to be hoping that the rate cut will boost flagging business borrowing. It did not want to spark a fresh round of property speculation in Sydney and Melbourne.

Mr Stevens said the bank was reassured by improved lending standards, enforced by the Australian Prudential Regulation Authority. Growth in home lending was slowing while a flood of new apartments was coming on to the market over the next few years in the eastern capital cities.

“The likelihood of lower interest rates exacerbating risks in the housing market has diminished,” he said.

Bank economists doubt that the rate cut, which follows a similar reduction in May that was largely passed on to borrowers, will have much impact on either economic growth or inflation.

National Australia Bank chief markets economist Ivan Colhoun said low rates of inflation reflected intense competition among super­markets, falling petrol prices and growing housing supply stopping rent rises, which would not be affected by the cut.

The Australian dollar rose after the move to US75.5c.