Banks likely to withhold rate cut

While industry stakeholders remain at odds over whether or not the Reserve Bank of Australia will drop the cash rate when the Board meets next week, it is becoming increasingly unlikely that Australia’s banks will pass on any rate cut in full.

The banks have gone to great lengths to forewarn borrowers and brokers that any rate cuts delivered by the RBA may be withheld.

At the end of last year, ANZ  said the bank’s funding costs were now largely unrelated to movements in the Reserve Bank’s official cash rate.

As a result, the lender decided to align its mortgage rates more closely with its funding costs and review its rates on the second Friday of each month – independently of the RBA.

Less than one week later, Westpac said that the lender had decided to follow ANZ’s suit and review its mortgage rates independently of the Reserve Bank.

We are probably going to see the RBA drop the rates. But, the big question will be whether or not the banks pass on the rate cut in full and I don’t think they will.

All borrowers would really benefit from another 25 basis point rate cut, but I do not think we will see the rate cut passed on in full.

If the banks withhold some or all of the rate cut, it would really hurt the level of housing activity.

Given the weak housing numbers we saw this month, I think there is a good chance we will see another rate cut in February. But, will it be passed on? I don’t necessarily think that will be the case, which will ultimately limit the amount of people coming back into the housing market.



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