RBA cuts rate by 0.5%, but banks fail to follow

By Robin Christie | 01 May 2012

The Reserve Bank of Australia (RBA) has announced a shock 0.5% cut in the official cash interest rate, but the banks have so far failed to pass on the rate cut in full to borrowers.

With the official cash rate now sitting at 3.75%, hopes are high that the property market could be set to bounce back this year, but the extent of any increase in market activity may depend on how much of the 0.5% rate cut lenders pass on to their customers.

The Bank of Queensland was the first to move, dropping its variable rate by 0.35%, with NAB being the first of the Big Four lenders to announce a variable rate drop (0.32%). The Commonwealth Bank went on to trump NAB with its 0.4% cut, but this still fell short of the full 0.5% that had been called for.

“It is no secret that some lenders have shown a reluctance to pass on the full rate cut in a bid to safeguard their businesses against future funding costs. However, we are hopeful that in an effort to reignite the property market, entice new customers and in the spirit of competition, lenders will lower their home loan interest rates,” said Mortgage Choice spokesperson Belinda Williamson.

According to the Your Mortgage basic repayment calculator, a borrower with a 25-year, $250,000, Principal & interest mortgage at 7.5% would save $80.53 on their monthly repayments, and over $12,000 on the total amount of interest paid over the loan term, if they received the full 0.5% rate cut.

If their lender only passed on half of the RBA’s cut, they would still save $40 on their monthly repayments and over $12,000 on the total amount of interest paid.

Interest rate

Monthly repayments

Monthly repayment difference

Total interest paid

Interest paid difference
















Source: www.yourmortgage.com.au. Based on a 25-year, $250,000 P&I mortgage.

Williamson suggested, however, that “astute borrowers who rev up their loan repayment strategy by keeping repayments at the pre rate cut level could save thousands of dollars in loan interest and shave months, or years off their home loan term.”

Pressure on the banks

Should their lender fail to pass on the RBA’s rate cut, Williamson said that borrowers should see it as a signal to shop around for a more competitive deal.

“Of course, they should not move from one lender and/or loan product to another without carefully weighing up the cost versus benefit of doing so,” she added. 

The Housing Industry Association (HIA) added its weight to the call for undecided banks to pass on the rate cut in full, with the association’s chief economist, Harvey Dale, noting that the immediate attention now of Australian businesses and households will be on the banks.

“It is drawing a long bow to use bank funding costs as an excuse for not passing on today’s RBA interest rate cut in full to both Australian businesses and households,” he said. “Anything less than a 100% pass-through will further dilute the effectiveness of monetary policy and damage confidence in this important policy lever.”

Property market boost?

Commenting on the RBA’s decision, Residex CEO John Edwards noted that the interest rate reduction is going to provide a much needed consumer confidence boost and aid the country’s beleaguered property markets.

“Without some form of stimulus, we would have been likely to continue seeing housing values decrease across much of Australia. Today’s RBA decision should stop the heavy adjustment process which would have otherwise been inevitable in the Melbourne market, and it will help push all markets which were passed the bottom of the correction phase,” said Edwards.

“Depending on the content of the upcoming Federal Budget and its assessed impact, a further 25 basis point adjustment could come in June.”
Overall, however, Residex does not expect the rate adjustment to cause significant house price rises in most markets due to unaffordability issues which it expects to remain.

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