Why Australian lenders don't pass on RBA rate cuts in full
The question on everyone’s mind at the beginning of last month was undoubtedly around the RBA’s decision to cut rates. Anyone from property analysts to deposit zealots looked to lenders after 25 basis points were trimmed off the official cash rate.
Now that the dust has settled, who passed on the full RBA cut?
The good
Australia’s fifth largest lender, ING Direct, earns the gold star for the first to move after the RBA announcement. It passed on the full cut to its mortgage holders. You might remember it also passed the full rate cut on in October, too.
Other lenders impressing consumers this year include newcomer Yellow Brick Road and MyRate. They all passed on the full quarter-percentage-point cut.
The not so good
The big four, including laggard ANZ, cut by only 20 basis points. Add to the naughty list Bank of Queensland, Suncorp, Bankwest, ME Bank, AMP, State Custodians and RAMS to name some of the vast majority of lenders who didn’t pass on the full cut.
So why aren’t our lenders passing on the full cut to borrowers?
Lenders have argued the increased cost of funding is to blame.
After the fallout from the global financial crisis settled, Australian lenders sought to protect themselves from the unstable overseas markets they previously gathered funds from. To do this they upped their sourcing of domestic funds through deposits from under 40% in 2007 to a figure now around the 50% mark.
There has been an explosion in popularity in the humble term deposit because of this — it now makes up approximately 45% of a major bank’s deposits, up from 30% in 2007. Inevitably there are downsides to this. Lenders are now claiming increased competition in this sector is causing funding costs to skyrocket.
Borrowers may be angry that their lender hasn’t passed on the full rate cut, but let’s look at the RBA December decision itself. RBA deputy governor Philip Lowe admitted the last cash rate cut was partially because lenders haven’t been passing on previous cuts in full. In fact he says the cash rate is about 1.5% lower than what it would’ve been if lenders were playing nice.
It’s true the last time the official cash rate stood at 3% was during the height of the GFC in 2009. The average mortgage rate then was 5.8% — much lower than what it is now. Even if we take the 150 basis points worth of cash rate cuts Mr Lowe is talking about conservatively, borrowers don’t have too much to complain about.
Aside from the obvious, what’s changed since 2009 is that there remains potential for further rate cuts on the 2013 horizon. ANZ chief economist Warren Hogan believes about 100 basis points worth of them. In addition our lenders are safer and as a result at-call savings accounts and term deposits will experience more competitive rate battles in the long term.
In my next post, I’ll share the predictions of the nation’s top RBA cash rate picking economists.
Adrian Barclay is a personal finance expert at HomeLoanFinder.com.au