The Reserve Bank of Australia and the federal government have made it clear that they expect banks to pass on official interest rate cuts in full to borrowers. However, data from RateCity regarding the response of the banks to recent rate cuts suggests that borrowers should be prepared to be disappointed, with the banks likely to pass on as little as half of any cut that the RBA might announce today:
Data obtained from comparison website RateCity highlights the growing interest rate fatigue by the big four banks. In the past three cash rate cuts, less and less was passed on each time to customers.
Across the previous year’s cuts in June, July and October, the average rate passed on by the four major banks went from 0.22 per cent in June, 0.21 per cent in July and 0.14 per cent in October…
RateCity research director Sally Tindall said the low-rate environment was “problematic” for funding decisions that were not entirely based on cash rate movements.
“Banks also consider the cost of wholesale funding, competition in the market, operational costs and most recently, an inability to pass on a full cut to deposit accounts that are already bordering on zero,” Ms Tindall said.
“In this low rate environment, cuts to the cash rate, which are designed to stimulate the economy, are now leaving homeowners feeling short-changed.”
The problem facing the RBA is that monetary policy becomes ineffective when bank deposit rates hit their lower bound, as they are currently:
While the RBA can theoretically cut the cash rate another 0.75%, the banks cannot cut deposit rates much further without compressing their net interest margins (i.e. the spread between deposit and lending rates).
This means that only a fraction of further interest rate cuts will be passed onto end borrowers.
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