The Reserve Bank of Australia (RBA) is Australia’s central bank. One of its biggest roles is to decide Australia’s 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.
Why Wouldn’t The Banks Pass On The Full Cut?
The banks are likely to try to protect their net interest margins (NIM), which is the profit margin banks make on the money between what it costs them to borrow and the interest rate they lend out to borrowers like you and I.
The lower the official interest rate goes the harder it is for a bank like NAB to make a decent profit. So if the RBA cuts the interest rate again today by 0.25% then the banks may only pass on something like 0.15% or 0.2% of the cut.
Reporting by the Australian Financial Review said that banks are worried about lower profit and revenue from term deposits. It seems fairly likely that the RBA is going to cut today with a 76% chance according to analysts.
However, some analysts believe that Australia and New Zealand Banking Group (ASX: ANZ) may end up passing on the full rate cut because of how much market share it has been losing in recent months due to its lending practices.
Either way, Treasurer Josh Frydenberg wants the banks to do their best. He said at the Australian Financial Review Property Summit, “My message to them is to cut as much as you can. The RBA governor is saying that they should. I think banks pay attention to those comments.”
If the big banks are able to maintain their NIM profit after today’s likely cut then the bank dividends could be intact until next time whilst also hopefully making the Australian economy safer.
I think it will take more than just a rate cut to fix things, it may take some fiscal stimulus from the government. Whatever happens, I think it’s a good idea to hold some of the reliable shares in the free report below.
At the time of publishing, Jaz does not have a financial interest in any of the companies mentioned.