Banks talk tough on rate cuts

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A banking industry spokesman has all but admitted that Australia’s major banks won’t pass on any rate cut in full when the RBA makes its first official cash rate decision of the year on Tuesday.

In defence of the banks, Australian Bankers’ Association (ABA) chief executive Steven Münchenberg has pointed to the GFC and the European debt crisis as factors that may lead the banks only to pass on a partial rate cut.

“We understand that many people will be angry if banks do not pass on the full extent of RBA rate changes. For over ten years banks moved in step with the RBA and that created the reasonable expectation that the RBA cash rate was the only factor determining bank funding costs and the interest rates banks charged. Unfortunately, the global financial crisis has shown that this is not the case,” he said.

The ABA claims that, while the Reserve Bank still influences short-term interest rates, other factors, such as global uncertainty and a strong demand for deposits, also affect the banks’ funding costs. Due to these “other factors”, says the ABA, the Reserve Bank cash rate is no longer an accurate indicator of bank funding costs.

“Australia’s banks have to raise an important proportion of their funding from overseas. The deep crisis in Europe means the cost of borrowing money in those international markets has risen to levels last seen during the global financial crisis. The RBA does not influence the price of money internationally,” said Münchenberg.

According to the ABA, the major banks raise the money they lend to borrowers from three main sources:

  • Bank deposits, mainly from Australians (60%)
  • Money borrowed for less than 12 months from other banks, pension funds and investors, from Australia and overseas (20%)
  • Money borrowed for a longer period, usually from overseas banks and investors (20%)

 Will you switch loan provider if your bank fails to pass on any rate cut in full? Visit Your Mortgage to consider your options, or join the discussion in the mortgage and finance section of our property investment forum.

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