MFAA Article - Banks' refusal to pass on full RBA rate cuts

Industry figure baulks at banks’ refusal to pass on full RBA rate cuts

Yesterday’s RBA rate cut to a new record low of 1.5 per cent aims to boost inflation and ease the strength of the Aussie dollar, but it may miss the mark if lenders choose to pass on only part of it to their customers.

While all four of the major banks have passed on rate cuts to their customers, Mortgage Choice chief executive officer John Flavell has hit out at lenders who he says have chosen shareholder profits over customer outcomes. "It was deeply disappointing to hear some of the nation's largest and most profitable lending institutions announce that only 10 or 13 of the 25 basis point reduction would be passed on to their mortgage customers," he says. "The economy could do with the lift that a cut to the cash rate would provide."

The Commonwealth Bank will cut its standard variable mortgage rate from 5.35 per cent to 5.22 per cent, delivering a $23 boost to customers with a $300,000 mortgage, instead of the $44 those customers would have saved if the bank had cut to 5.10 per cent.

Meanwhile, ANZ has announced it will cut its rate by 12 basis points and Westpac will reduce its standard variable rate by 14 points, while NAB will only be passing on 10 basis points to customers.

NAB chief operating officer Antony Cahill justified the move by pointing to both shareholders and increased capital requirements. "We have to strike the right balance between providing customers with competitive mortgage rates and continuing to generate attractive returns for our 584,000 shareholders, while recognising that NAB's funding costs have been steadily increasing due to a range of factors, including the need to strengthen our balance sheet," Cahill said.

However, Flavell is having none of it. "If all lending institutions chose an equally profit-focused approach and held back this proportion of the 25 basis point cut, then this equates to something like $2 billion dollars taken out of the pockets of Australian mortgage holders and placed onto the bottom line of institutions that are already generating tens of billions of dollars in profits every year," he said.

Flavell adds that while lenders were quick in announcing partial rate reductions, it will take them longer to implement the cuts. "It can sometimes be weeks and/or months. There is no reason why a lending institution cannot pass on rate reductions to their customers as soon as they are announced," he says.

Meanwhile, smaller lender, Bank Australia, was one of the first to announce it was passing on the full rate cut to its customers, which will see their standard variable rate fall to 4.74 per cent.

The rate cut comes against a backdrop of historically low inflation, softening employment and an Australian dollar stubbornly determined to stay above $0.75 USD.

In a statement announcing the cut, Governor Glenn Stevens headed off fears it would reignite housing prices. He said housing prices had been rising "only moderately over the course of this year, with considerable supply of apartments scheduled to come on-stream over the next couple of years."

CoreLogic head of research Tim Lawless agrees the market will continue to moderate despite the rate cut. "The latest interest decision is likely to keep a base level of demand across the housing market," he said. "However, other factors such as affordability constraints, higher supply levels, tighter lending conditions and weak rental markets are likely to see growth conditions continue moderating back to more sustainable levels."