Cash rates will hit record lows on Tuesday if, as expected, Reserve Bank Governor Phillip Lowe shaves another 0.25 points off official interest rates, bringing them back to a minuscule 1 per cent.

If you are a borrower, that might sound good but don’t be too sure about that. Interest rates are now so low that the banks are being squeezed in ways that make it hard for them to pass on rate cuts.

The following table shows how the banks have been responding to recent interest rate cuts.

None of the big banks has handed all the RBA’s rate cuts back to home owners, and sometimes the banks have kept half the rate cut for themselves.

After the June 4 cut of 0.25 points, two of the big four, CBA and NAB, passed it all on. The ANZ passed on a miserly 0.18 percentage points and Westpac handing on 0.2.

“The banks will likely cut lending rates, but as the RBA cuts, it’s getting harder for them to cut by the same amount,” said Nicki Hutley, partner with Deloitte Access Economics.

Depositors will get slugged

If you’re one of the 30 per cent of Australians who depends on interest for a significant part of your income, you know how far deposit rates have fallen.

Saving rates, says Steve Mickenbecker financial services executive with comparison site Canstar, “are 0.3 per cent on savings accounts. You might get an introduction rate of 2 per cent but after a few months it goes back to 0.3 per cent”.

“They can’t take another 20 basis points off that or it would go to 0.05 per cent. So they’ll have to slash term deposits,” Mr Mickenbecker said.

Currently term deposits for 12 months are between 2 and 2.5 per cent and these figures will have to be cut back to around 0.25 per cent, he said.

Banks caught in a squeeze

“The banks get 60 per cent of their funding from deposits and if they took the deposit rate to zero they wouldn’t get any deposits,” said Martin North, principal at Digital Financial Analytics.

“They want to maintain their margin, but they are being squeezed and it’s having an impact on their profits.

“The only way out for the banks would be for the RBA to start quantitative easing [buying bonds back from the banks for cash] which would take the pressure off deposits and the banks’ cost of funds,” Mr North said.

No way out

That could be good for the banks in one respect, but it would not boost lending in the current environment and lift growth.

“In Japan and Europe it did nothing to solve the problem and everyone is waiting for a solution,” Mr North said.

Ms Hutley was also pessimistic on growth: “I don’t think cutting rates will turn the economy around.”

Business people were loath to invest when the economy looked stronger a year ago. Now they are less inclined to invest, Ms Hutley said.

“What we need is for the government to pass the first tranche of tax cuts, which would be equal to a 0.25 per cent rate cut,” she said.

Raising Newstart from current pitifully low levels and funding “shovel-ready” infrastructure projects, particularly in the regions, would help boost the economy, she said.