Finance Finance News Banks cut interest rates in response to Reserve Bank decision

Banks cut interest rates in response to Reserve Bank decision

The front of the Reserve Bank of Australia.
The RBA has cut the official cash rate to a record low 1.25 per cent. Photo: Getty
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Several banks have passed on the 0.25 percentage point interest rate to borrowers, while the ANZ has raised the ire of the Treasurer by only passing on part of the cut.

At its board meeting on Tuesday, the Reserve Bank cut the official cash rate to 1.25 per cent in what is a troubling sign for the economy, but probably good news for mortgage holders.

The ANZ reacted within 10 minutes of the announcement, cutting its standard variable rate by just 0.18 percentage points, 0.07 points shy of the full 0.25 points cut. The NAB and CBA later passed on the full 0.25 points, as did three smaller lenders – RACQ, Athena and Reduce Home Loans.

Assuming banks pass on the full 25-basis-points cut, home loan holders with a mortgage of $500,000 could expect to see about $73 shaved off their monthly repayments.

Treasurer Josh Frydenberg slammed ANZ’s decision to pass on just 70 per cent of the cut.

“I think the ANZ has let down its customers. This is deeply disappointing from the ANZ,” Mr Frydenberg said after the RBA decision and the ANZ response.

“It is the government’s expectation, indeed it is the public’s expectation, that banks should pass on, in full, to consumers, the benefits of reduced funding costs as a result of the Reserve Bank’s decision.”

RBA governor Philip Lowe said while the outlook for the global economy was “reasonable”, the risks stemming from the trade war between China and the US and weak international trade growth prompted the bank to cut.

Governor Lowe said the Australian economy was still expected to grow by about 2.75 per cent in 2019 and 2020, but there was still uncertainty about the prospects for household consumption, “affected by a protracted period of low income growth and declining housing prices”.

“Some pick-up in growth in household disposable income is expected and this should support consumption,” he said.

Speaking to The New Daily, BIS Oxford Economics’ head of Australia macroeconomics Dr Sarah Hunter said the cut “confirmed that in the RBA’s view the economy has slowed down over the past six months”.

Despite employment figures continuing to lift, weak income growth and the “negative wealth effect” – where people tighten their spending due to devaluation of their assets due to falling house prices – are both bad signs for the economy, she said.

Home owners could however be afforded some relief, as the majority of borrowers in Australia are on variable-rate loans and could see their repayments lowered as a result of the RBA’s cut.

“The critical caveat will be whether or not lenders do actually pass the cut on to borrowers,” Dr Hunter said.

When the RBA last cut the cash rate in August 2016, the big four banks all passed on smaller mortgage rate cuts of between 0.10 and 0.14 percentage points.

But when it cut rates in May 2016, the NAB, CBA and Westpac all passed the 25-basis-point cut in full, while ANZ opted for a 19-basis-point cut.

“All eyes now are on the big four banks to see what they’ll do,” Dr Hunter said.

“Wholesale funding costs have eased this year, so lending margins have improved recently, but the banks aren’t legally obliged to pass on the cut so there is a chance some lenders will chose to hold some of today’s cut back.”

Research director at Sally Tindall said banks that choose not to pass on the cuts will need to justify their decision to consumers, “otherwise they risk annoying their customers to the point that they get itchy feet.”

New cash rate a record-setter

Tuesday’s cut marks the first change to the cash rate since August 3, 2016, and has pushed rates to their lowest recorded levels.

A table showing Australia's historic cash rate since 1990.
A table showing Australia’s historic cash rate since 1990.

In the lead-up to the announcement, the ASX RBA Rates indicator has been showing a 100 per cent chance of a cut since May 28.

Economists expect there to be a second 25-basis-points cut to 1.0 per cent in coming months, likely in August.

Opinion is divided on how much further the RBA may go, with Westpac tipping a third rate cut in November, while JP Morgan predicts four cuts to take the cash rate to 0.5 per cent by mid-2020.

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