Banks may not pass on rate cuts

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The Reserve Bank is being tipped to cut the official cash rate when it meets Tuesday week, but speculation is mounting that the major banks may not pass on any rate cut to borrowers in full.

With inflation sitting well within the RBA’s targets, it is claimed that there is no reason for the bank’s decision makers not to cut the official cash rate when they meet on Tuesday week.

“The December quarter headline inflation result shows that prices were flat over the past three months, while the more closely-watched weighted median came in at 0.5%, leaving annual underlying inflation at 2.6 per cent. This is well within the Reserve Bank’s inflation target band and leaves the RBA with plenty of space to cut the official cash rate at the next meeting,” said Housing Industry Association senior economist, Andrew Harvey.

“In light of continuing global uncertainty and some fragility in the non-mining sectors of our own economy, there should be no question as to a rate cut in February. It’s the only prudent course of action, as is the banks passing on any rate cut in full,” he added.

However, rumours have been circulating that the Big Four banks may not pass on any RBA rate cut in full, and may even increase home loan rates this year regardless of the RBA's decisions.

This speculation is being driven by the increased borrowing costs that the banks now have to contend with due to the effects of the European debt crisis. According to the Australian Financial Review, for example, a Morgan Stanley analysis has predicted the banks will reprice home loans in an effort to offset these higher funding costs – passing on only a fraction of any RBA cuts to borrowers.

Goldman Sachs, too, have predicted that the big banks may not pass on any rate cuts in full – forecasting that they may pass on just 0.15% of the 0.25% official cash rate cut that’s expected to take in February.

Westpac, in particular, has been tipped as a leading contender to break ranks with the RBA due to its high exposure to Australia's mortgage market. Rival Big Four lender ANZ made the controversial move late last year to make its monthly interest rate decisions independently of the RBA. It has since made one independent rate call, deciding to keep its interest rates on hold.

NAB, too, have entered the debate, with the bank's chief executive Cameron Clyne telling radio station 3AW this week that he couldn't guarantee that NAB will pass on any rate cut in full.

"There's no correlation to what the Reserve Bank does and the cost of our funds," he said.

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  • Mike says on 31/01/2012 03:51:54 PM

    So the banks are pleading poverty now are they? It'll be interesting to see what kind of backlash there is if the RBA cuts the rate by 0.25% and the banks don't follow.

  • Yves says on 31/01/2012 03:54:15 PM

    The banks are always shifty. People say they don't trust used car salesman, but I've been screwed over by banks way more!

  • Shane says on 31/01/2012 05:44:26 PM

    There won't be any backlash....the banks can (and have previously) done what they want. We all just end up bending over and taking it. Next time there is a GFC the government should not offer "government backed gaurantees" for the banks benefit and if they do vote them out.

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