Cash rate cut, but borrowers unlikely to enjoy the full benefit
The RBA has cut the cash rate by 25 basis points to 3.25% – the lowest the cash rate has been in three years – but borrowers are unlikely to receive the full benefit of the reduction.
A 25-basis-point rate cut would reduce monthly mortgage repayments on a $300,000 variable rate mortgage by around $50 a month.
Passing on 20 out 25 of the basis points on offer, as the Bank of Queensland announced within two minutes of the 2.30pm RBA announcement, equates to only a few dollars fewer a month, although the banks will face a public backlash if they don’t pass on the full rate cut.
Media attention will focus on the deep pockets of the banks and their recent multibillion-dollar profit announcements in the recent reporting season.
The banks will argue that they have to balance the need of shareholders against those of customers and that aspects of their funding mix remain expensive, including funding from household deposits.
The Reserve Bank indicated today the banks are well positioned to secure additional funding.
“Well-rated banks, and Australian banks have had no difficulty accessing funding, including on an unsecured basis,” said RBA governor Glenn Stevens in the monetary policy decision statement.
It followed comments in the bank's September Financial Stability Review, which noted that “the Australian banking system has remained in a relatively strong position”.
“Pressures in wholesale funding markets have eased since late last year, allowing the large banks to maintain good access to international bond markets during the past six months,” the RBA said.
However, the RBA also noted that banks have reduced their dependence on wholesale funding with a greater reliance on retail deposits to fund mortgage lending.
In his latest banking report, Nomura analyst Victor German said household deposit growth remained strong in August among the major banks, a positive for their overall funding profile, but warned that Nomura’s latest survey of deposit spreads “highlighted that competition for deposits continued to be intense”.
The Australian Bankers’ Association explained in August that banks source their funds from equity investors, depositors and from the short and long-term wholesale markets.
“Deposits and long-term wholesale are the two sources of funds which are now structurally more expensive than they were pre-crisis. Short-term funding and equity are almost back to pre-crisis prices,” it said.
“Banks need to maintain an adequate level of profitability to maintain solid credit ratings which bear directly on the price and availability of funding. Sustainable profitability also provides broader benefits to the community, including employment, salaries and wages, and downstream benefits to partners and suppliers,” said Steven Münchenberg, CEO of the ABA.