Why aren’t the Big Banks passing on rate cuts in full?

Why aren’t the Big Banks passing on rate cuts in full?

It’s a question so desperately needing an answer that the Government has launched an investigation to find one.

To stimulate a flat-lining economy and keep abreast of International trends, the Reserve Bank of Australia (RBA) has cut interest rates three times since the Federal Election in May. They now sit at a record low 0.75 percent.

Yet much to the frustration of RBA boss Philip Lowe and Treasurer Josh Frydenberg, none of Australia’s major banks – Westpac, ANZ, Commonwealth or NAB – have passed on any of the cuts to customers in full.

After another basis point was shaved from the increasingly slender official rate on 1 October, Frydenberg lost patience with the ‘Big 4’ and ordered the Australian Competition and Consumer Commission (ACCC) to investigate their conduct.

Somewhat surprisingly, the banks in question welcomed his announcement as an opportunity to explain their reasons on a larger platform.

Accused of greed and subservience to shareholders over customers, the banks maintain their business model cannot tolerate full cuts, more so as the official rate approaches zero.

Banks work on three magical words: Net Interest Margin. This is the difference between the interest they charge on loans, and the interest they pay out to investors, including everyday depositors and savings account holders.

Much of a bank’s operating costs, profit forecasts and executive bonuses rely on a decent Net Interest Margin. But as the official rate drops to vanishing point, wiggle room reduces.
Understandably, banks are loath to drop savings rates below zero and effectively charge customers to give them money. This would have a chilling effect on their ability to attract investors who effectively finance the loans.

So the banks maintain they must preserve breathing space by only passing on a fraction of the cuts to mortgage and loan holders. Smaller lending institutions have been able to pass on bigger cuts, even cuts in full, because they don’t suffer from the same overheads, let alone a duty to pay shareholders a nominated dividend.

This disparity has brought a range of other providers into the equation for Australian home and small business owners, whom previously would have only secured finance from a bank.
If you are currently with a bank and are unhappy about your loan rate, compared to what is on offer in the open market, Interlease can help. With almost 50 years’ experience, our finance broking team can find the perfect loan or refinancing solution to fit your needs.