Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd (ASX: NAB) will not pass the full RBA interest rate cut to borrowers.
The Reserve Bank of Australia is Australia’s central bank. One of its biggest roles is to decide Australia’s ‘official’ interest rate, taking into account economic conditions including unemployment, inflation and the housing market. The RBA interest rate has a ripple effect across the whole economy because it means debt (like mortgages) get cheaper or more expensive.
Interest Rates Cut… Again
Yesterday, the RBA made the decision to cut the official interest rate to 1.00% from 1.25%.
It’s worth noting that interest rates are down from 7% just 10 years ago and over 15% in the 90s.
In response to this week’s cut, the CBA has said it will reduce its owner-occupied principal and interest standard variable rate home loan by 0.19% — not the full 0.25%, thus withholding 0.06% of the rate cut.
However, CBA said the full rate cut will be passed to interest only variable rate loans, possibly because these borrowers would, in theory, be more likely to spend the money saved and stimulate the economy.
Westpac will cut rates on its variable home loans by 0.2% for owner occupier customers and 0.3% for interest-only customers. These changes will come into effect on 16th July.
NAB will cut rates on variable rate home loans by 0.19%, the same as CBA. NAB and CBA both passed the previous rate cut in full to borrowers, while Westpac passed on 0.2%.
What About ANZ?
Australia and New Zealand Banking Group (ASX: ANZ) has set itself apart by passing on the full rate cut of 0.25% to all of its variable interest rate loan customers.
However, ANZ is not ahead of the other banks, as they only passed on 0.18% of last month’s rate cut.
What Does All This Mean?
The fact that the banks are not passing on the full rate cut suggests that their profit margins are really starting to feel the pressure. It’s also interesting that CBA and Westpac chose to pass the full rate cut (or more than the full cut for Westpac) to their interest-only customers.
This would suggest that interest-only investor loans have slowed which may not be a good sign for the property market.
The inability to pass on the full rate cut may also make the RBA think twice about cutting rates further. If the banks can’t pass on the rate cuts, there would be little effect on the economy.
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Disclaimer: Any information contained in this article is limited to general financial/investment advice only. The information has not taken into account your specific needs, goals or objectives, so please consider consulting a licenced and trusted adviser before acting on the information. Please read The Rask Group’s Financial Services Guide (FSG) for more information. This article is authorised by Owen Raszkiewicz of The Rask Group, which is a corporate authorised representative No. 1264179 of Strawman Pty Ltd (ACN: 610 908 211) (AFSL: 501 223).
Disclosure: At the time of writing, Max does not own shares in any of the companies mentioned.