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Benefits of low rates to offset margin squeeze, insists RBA

The Reserve Bank has claimed that the impact of its rate cuts on credit quality would outweigh the strain on bank margins.

In an address to the AFR Business Summit, deputy governor of the Reserve Bank of Australia (RBA) Guy Debelle discussed the Australian economy’s capacity to manage the impact of the coronavirus (COVID-19) on market activity.

The RBA’s monetary policy tools were among the countermeasures cited by Mr Debelle, who said the central bank’s decision to cut the cash rate in March was taken to “support the economy by boosting demand and to offset the tightening in financial conditions that otherwise was occurring”.

Mr Debelle noted the response to the cash rate reduction from lenders, which largely passed the full 25 bps cut to home loan customers.

“The reduction in the cash rate at the March meeting was passed in full through to mortgage rates. The cash rate has been reduced by 100 basis points since June,” he said.


“This has translated into a reduction in mortgage rates of 95 basis points. This has occurred through the combination of a reduction in the standard variable rate of 85 basis points, larger discounts to new borrowers and existing borrowers refinancing to take advantage of larger discounts.”

However, lower mortgage rates have also increased pressure on bank margins, particularly for smaller lenders.

Last week, CEO of the Customer-Owned Banking Association (COBA) Michael Lawrence called on policymakers to reconsider their approach to banking reform, warning that the mutual banking sector would struggle to manage higher compliance costs in a low rate environment.

Despite acknowledging such concerns, Mr Debelle insisted that the effects of lower interest rates on bank margins would be offset by a general improvement in credit quality in response to broader economic stimulus.  

“While a lower and flatter interest rate structure puts pressure on bank margins, it is important to remember that the easing in monetary policy will help support the Australian economy which in turn supports the credit quality of the banks’ portfolios of loans,” he said.


“The virus is a shock to both demand and supply. Monetary policy does not have an effect on the supply side but can work to ensure demand is stronger than it otherwise would be.

“Lower interest rates will provide more disposable income to the household sector and those businesses with debt. They may not spend it straight away, but it brings forward the day when they will be comfortable with their balance sheets and resume a normal pattern of spending.

“Monetary policy also works through the exchange rate which will help mitigate the effect of the virus’ impact on external demand.”

The deputy governor of the RBA went on to express confidence in the banking sector’s resilience to the crisis.

“The Australian banking system is well capitalised and is in a strong liquidity position. The Australian banks had raised a significant amount of wholesale funding before the disruption to markets and deposit inflows are robust. They are resilient to a period of market disruption,” he said.

“Spreads on Australian bank bonds have widened, although yields remain at levels that are still very low historically. We have not seen any particular sign of pressure in our daily market operations to date.

“The spread between the bank bill swap rate and the expected policy rate (OIS) has risen in recent days but remains low, nothing at all like what occurred in GFC.”

Earlier this week, Prime Minister Scott Morrison also announced that the federal government would soon release a “targeted” stimulus package to help support the economy.

Mr Debelle said that government support, along with low interest rates, a lower exchange rate, a pick-up in mining investment, sustained spending on infrastructure, and an expected recovery in residential construction, would help support growth in the Australian economy once the economic effects of the virus fade.

[Related: ‘Think again’: PM issues call to action amid recession fears]

Benefits of low rates to offset margin squeeze, insists RBA
Guy Debelle

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Charbel Kadib

Charbel Kadib is the news editor on the mortgages titles at Momentum Media.

Before joining the team in 2017, Charbel completed internships with public relations agency Fifty Acres, and the Department of Communications and the Arts.

You can email Charbel on: This email address is being protected from spambots. You need JavaScript enabled to view it.

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