Big banks under pressure to cut rates without RBA prompting as no cash rate cut tipped for next week

Borrowers hoping for some relief from the RBA next week are likely to be disappointed with the most likely outcome being the cash rate remaining on hold at 3%, though the call could go either way if money markets are to believed.

They have the chance of a rate cut priced in at 54%.

However, the latest Bloomberg survey of economists has just eight of 29 tipping a rate cut on Tuesday with none of the major banks expecting the Reserve Bank to resume its easing cycle that would take the cash rate to a 2.75%.

However, with ANZ and Westpac both reporting 10% rises in interim cash profits to the end of March (a combined $6.72 billion), despite subdued mortgage lending and “challenging” conditions, media commentators are again speculating about the major banks cutting variable mortgage rates outside of official RBA decisions.

There was no hint in the mix of media releases, presentation packs and financial reports from either ANZ or Westpac that they would consider cutting mortgage rates outside of the RBA, though both have been more than willing to raise them outside of an RBA move in past years while also not passing on recent rate cuts in full.

Both Westpac’s Gail Kelly and ANZ’s Mike Smith have hinted they are not currently contemplating an out-of-cycle rate cut.

Kelly defended Westpac’s track record on rates saying overall costs have been rising as the bank looks to grow its customer deposits while Mike Smith has said ANZ’s current interest rate setting are “appropriate”.

Fairfax economic commentator Malcom Maiden argues that the banks have the big profits to pay increased dividends to their shareholders and now need to give something back to their customers too.

“The banks can no longer argue that they need to retain some part of any future rate cut, and the case for them not only passing on cuts in full but moving unilaterally to cut their own rates is growing. They can certainly afford it, as the March half profit results show,” Maiden writes.

He expects that “sometime this year” one of the major banks will either announce a cut in its variable home loan rate unilaterally, or pass on all of an RBA cash rate cut, plus an additional cut of its own.

Once one does, he says, the others will be forced to follow.

We'll just have to wait and see, but I for one would not be holding my breath given future profit expectations.

Looking ahead to Tuesday’s cash rate decision, Westpac’s Bill Evans expects the RBA board will keep rates on hold while maintaining its clear easing bias though he says the decision will be a “closely run event” with the case for another cut “now been made”. 

“However, with rates at historical lows, we think the Board will be cautious and decide to wait another month before moving. 

“Accordingly we are retaining our forecast that the next move in rates will be a reduction of 25 basis points in June to a new historical low of 2.75%. 

“We have held that forecast for a low of 2.75% since May last year. Our current view is that rates will then be on hold through 2013 and 2014 but we recognise that the risks are clearly to the downside – recent developments have increased those risks,” Evans says. 

AMP Capital chief economist Shane Oliver also believes the case has been made for a rate cut on Tuesday but says the RBA may “prefer to get a look at the Budget the week after and March quarter business investment data to be released later in May”. 

“So while I expect a cut in the cash rate to a record low of 2.75%, I am agnostic as to whether it’s on Tuesday or next month. 

“The money market also appears to be agnostic with just a 54% chance of a cut priced in for Tuesday,” he adds.