Analysts: Banks May Pocket Some of Expected RBA Rate Cut

While recent statistics indicate the Reserve Bank of Australia (RBA) would likely cut the overnight cash rate when it meets in May, any rate cut would hardly benefit Australian mortgage customers.

Besides the expected rate reduction likely limited to only 25 basis points, analysts warned that Aussie banks would likely pocket some of the anticipated cut to offset higher funding costs.

The chances of a rate cut became higher with the release by the Australian Bureau of Statistics on Tuesday of the inflation rate for the March quarter which went up by just 0.1 per cent and pulled down the yearly inflation rate to 1.2 per cent.

The March quarter report registered a 1.6 per cent inflation rate. The annual CPI rate is considered the lowest yearly inflation rate since 2009 and significantly lower than the RBA's target of 2 to 3 per cent.

TD Securities head of Asia-Pacific Research Annette Beacher hinted that the banks would likely cut their mortgage rates by 15 basis points only if the RBA reduced the overnight cash rate by 25 basis points in May. However, she said the inflation result boosted expectations for a 50-basis point cut although she admitted that chance is considerably slim.

"If the RBA goes 25 basis points, I would imagine they would pass it all on but if the RBA goes 50 (basis points0 I would imagine, on average, they'd keep 10 basis points," The Sydney Morning Herald quoted BBY banking analyst Brett Le Mesurier.

"If the RBA goes 50 it gives the banks greater capacity not to pass it all on. Obviously, a 40-basis-point reduction would still be very unwelcome to the long-suffering mortgage holder," he added.

Mr Le Mesurier confirmed that banks' claim that its funding cost is higher is real. He cited the case of Commonwealth Bank which recently paid for a covered bond issue higher market rates. The banks are expected to support their claim that their funding costs continue to go up.

Analyst added that if the RBA would reduce interest rates by 25 basis points only on Tuesday, they are certain of another 25 basis points cut by June. Other analysts, however, suggested the possibility of a third option which is a 35-basis points cut.

Uncertainty over interest rates has caused borrowers to shift to fixed from variable mortgage rates, The Australian reports. According to National Australia Bank's Mortgages General Manager Sally Bruce, volumes of fixed rate loans increased three- to four-fold compared to 24 months ago because of the volatile movements of the variable rates.