ABA Cites Global Uncertainty as Reason Why Aussie Banks Would Likely Not Pass Any RBA Rate Cut in Full

Ahead of the Reserve Bank of Australia's (RBA) Monetary Policy meeting on overnight cash rates set on Feb 7, Australian banks are once again hinting that they would likely not pass in full to borrowers any rate cut that the RBA will announce.

Australian Bankers' Association Chief Executive Steve Munchenberg pointed to the worsening global uncertainty as the rationale behind Aussie lenders not passing in full any key lending rate reductions.

"We understand that many people will be angry if banks do not pass on the full extent of RBA rate changes. For over 10 years banks moved in step with the RBA and that created the reasonable expectation that the RBA cash rate the only factor determining bank funding costs and the interest rates bank charged. Unfortunately, the global financial crisis has shown that this is not the case," Mr Munchenberg said in a statement.

Banks, particularly the big four, have earlier said that their funding costs were more linked to the eurozone crisis than the overnight cash rate set by the RBA. However, Mr Munchenberg assured Australians that lenders would not just hike rates unilaterally.

"The RBA still influences some bank funding costs and can cut or raise the cash rate to drive responses from banks. If the banks do not follow a change in the cash rate, the RBA can change the cash rate again until commercial interest rates are where the RBA wants them," he added.

Among the big four, ANZ Bank has officially moved away from the RBA decisions in determining its interest rates. Instead, ANZ announces interest rate changes every second Friday of the month.

Westpac has previously hinted that it may follow ANZ in securing independence from RBA policies. On Friday, Westpac Chief Executive Gail Kelly said the bank would adopt a wait-and-see attitude and refused to make any confirmation if it would pass in full any rate cut expected from the RBA meeting.

"I'm not going to foreshadow ahead of the time what decision we are going to make with regard to interest rates. We will just have to wait and see what happens next week," Ms Kelly told ABC Radio.

Economists are divided on what decision the RBA will come out with on Tuesday.

HSBC chief economist Paul Bloxham said that despite wide expectations for a February rate reduction, recent data indicate there could be a close decision at the Australian central bank's Tuesday meeting.

AMA Capital chief economist Shane Oliver said that RBA would likely cut rates because of a weakening job market, weak retail sales and housing construction, falling house prices and sub-par consumer and business confidence.

ICAP senior economist Adam Carr said that while there is no economic reason for another RBA rate cut the bank will nevertheless reduce rate.

"I say that because even the RBA board acknowledged in December that there probably wasn't really an economic justification to cut, they were doing it pre-emptively because of Europe, but Europe has stabilised," The Sydney Morning Herald quoted Mr Carr.