Banks Likely to Retain a Part of Expected RBA Rate Cut

All eyes are not only on the Reserve Bank of Australia (RBA) which announces on Tuesday its decision on the overnight cash rate, but also on Australian banks if it will pass in full any rate reduction.

Even the banks agree that the RBA would likely cut the cash rate by at least 25 basis points due to the worsening global financial situation, but the bigger question in the minds of many Australian borrowers is if the lenders would pass in full any rate cut or keep part of it as they did in May.

The RBA cut interest rates in May by 50 basis points to bring the rate down to 3.25 per cent. However, 85 per cent of the lenders kept an average of 18 basis points then and passed only 32 basis points. Only three lenders passed in full the May rate cut, these are Defence Bank, Unicredit and Macarthur Credit Union.

As a result of the banks keeping a part of the rate cut, borrowers are paying 3.3 percentage points above the official cash rate for their home loans. Observers pointed out that it is higher than the rate they were paying during the global financial crisis.

Ahead of the RBA announcement, Australian Bankers' Association Chief Executive Steven Muncheberg explained there is no longer a one-to-one relationship between the RBA rate and mortgage rates. He attributed it to instability in the financial markets, while banks pointed to the higher cost of money they borrow overseas.

The spokeswoman of comparison Web site RateCity, Michelle Hutchison, placed a decent chance for a 25-basis points cut by the RBA, but added the banks would likely not pass the rate cut in full. She, however, questioned such a likely move given the banks earnings.

"I can understand that funding models can change, but we have seen rising profits by the big banks and we have also seen their ability to be nimble when it works for them and slow when it works for the consumer," Courier Mail quoted Ms Hutchison.

Meanwhile, South Australia Treasurer Jack Snelling urged the RBA to cut the overnight cash rate by 50 basis points. He cited the slowdown of the economic, weak housing market and retail sales data as reasons for a higher rate.

To boost SA's home market, the state government in its budget last week extended the first home bonus grant of $8,000 for at least another 12 months and provided stamp duty concessions of over $21,000 for residents who would buy off the planned apartments in the city.

"At the end of the day people's spending patterns are going to be determined by a number of factors and obviously the interest rate they're paying on their mortgage is going to be the predominant influence in the decisions they make about what they're spending," ABC quoted Mr Snelling.