On 1 October, the RBA cut the official interest rate by 25 basis points to 0.75 per cent, the third identical cut in just five months.
How did the banks respond?
The major banks have landed themselves in hot water by only passing on a portion of the cuts, citing the pressure of low margins. Federal Treasurer Josh Frydenberg, RBA Governor Philip Lowe and even Prime Minister Scott Morrison have admonished the banks for refusing to pass on the full cut.
“This is very disappointing,” said Mr Frydenberg. “Customers should vote with their feet.”
NAB and Westpac made a 15 basis-point cut across their investor and owner-occupier standard variable rate loans, although investors with NAB on an interest-only loan will get a massive 30 basis-point reduction. ANZ offered a 14 basis-point cut for owner-occupiers and a 25 basis-point cut for investors. Commonwealth Bank passed on a 13 basis-point rate cut for all owner-occupiers and investor principal and interest (P and I) loans. Investors with interest-only loans will receive the full 25 basis points.
What’s the problem?
The recent rate cuts aim to encourage consumer and business spending, support employment growth and put upwards pressure on wages. Ultimately, the RBA wants to reach our inflation target of between 2 to 3 per cent, and bring the economy back into a healthier position. But when banks don’t pass on the full savings to consumers and businesses, the effect of the cuts is diluted.
One report from comparison website RateCity showed that while the RBA has reduced the official cash rate by 4 per cent since October 2011, standard variable rates have fallen by just 2.99 per cent. As a result, the average margin on standard variable loans for the big banks is now 4.05 per cent above the cash rate, well up from the 3 per cent margin in 2011 and more than double the 2 per cent margin from pre-GFC days.1
However, it’s important to note that net interest margins for the banks – which take into account not just profit from lending but also profits from deposits (which is already close to zero), wholesale funding, remediation costs and shareholder capital – did in fact drop in the first half of this year. It’s essential to our economy that banks are solidly profitable; not only are they are a key source of dividend income for Australians, but even more importantly, their ongoing success secures access to capital, which in an economic crisis (such as the GFC), props up the entire economy.2
What does this mean for borrowers?
The good news is that the push and pull between policymakers and the banks may lead to beneficial consumer outcomes. Lenders don’t want to upset policymakers or consumers but they do have to balance the requirements of their business. They still need your custom and they are willing to compete for it. Even if lenders don’t have enough fat in their budget to give back to mortgage holders, some may choose a lower return on equity to secure a customer. Interest rates also look set to fall further with at least one more cut, and potentially even two more, expected by February 2020.3
All this puts borrowers in the power position when it comes to negotiating on interest rates. The smart move is to contact your Smartline Adviser as they can negotiate with your current lender for a competitive rate or help you secure a more suitable loan for your needs.
SOURCES: 1https://www.theaustralian.com.au/nation/banks-14bn-ratecut-cash-grab/news-story/12e8afbd93ccf2fa71845ccb37bd13a0, 2https://www.abc.net.au/news/2019-10-02/interest-rate-cut-not-passed-on-by-banks-in-full-for-good-reason/11565594, 3https://www.theaustralian.com.au/business/economics/reserve-bank-takes-the-gloves-off-with-rate-cut-to-historic-low/news-story/bcc980c11931189037eb09d932ea133a