Borrowers wait anxiously to learn if banks will pass on rate cut

Yesterday, following the RBA announcing it would cut rates by 0.25% to 4.25%, Twitter was flooded with tweets awaiting news of the major banks announcing their rate cuts.

The Commonwealth Bank responded with the following message:

“We are currently reviewing our interest rates in light of the RBA decision.”

Today, borrowers are being told to brace themselves for the banks not passing on the full rate cut.

This message has been flagged for some time, most notably by former Commonwealth Bank boss Ralph Norris, as he stepped down from his position last month.

Norris says the notion of the banks “automatically following the RBA” is outdated as the cost of funds lent to consumers is driven up by the troubles on global credit markets.

Norris told The Australian Financial Review at the time there was no guarantee the banks would pass on the next RBA interest rate cut.

“Nobody can give unqualified guarantees in anything in life… At this time I would have to say it will be what the situation is at the time the RBA makes its cut,” he said at the time.

In the wake of the global financial crisis, which froze international credit markets, the major banks did not pass on full RBA interest rate cuts and also increased interest rates independently of the central bank.

Speaking at the AICC property lunch in Sydney last week, outgoing Dexus boss Victor Hoog Antink hinted at a similar approach by lenders when he said there would be “potential margin creep for the banks as they deal with capital issues emerging from Europe”.

NAB was the only lender not to pass on the full 25-basis-point cut in November to its borrowers, passing on 20 basis points with its head of personal banking, Lisa Gray, saying at the time that “volatile overseas markets and impending global banking security requirements had pushed up the costs of providing funds for lending”.

The threat of banks not passing on full rate cuts was also acknowledged by AMP Capital chief economist Shane Oliver in his regular insights piece.

“Australian banks have been warning their funding costs have been increasing. If this intensifies, then there is a risk that banks may actually increase their lending rates – both business rates and mortgage rates – independently of the RBA,” Oliver said.

In his September note on the outlook for the banking sector (before the crisis in Europe reached its current level), JP Morgan analyst Scott Manning said the discounting of mortgage products by the major banks was reaching a point of being loss making for banks to originate new mortgages.

Bank of Queensland and ME Bank have already announced they will pass on the rate cut in full.

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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