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No excuses: RBA governor calls on banks to pass on full cut

The lower cash rate “should be fully passed through to variable mortgage rates”, Reserve Bank governor Philip Lowe has said, noting that banks have room to move following the fall in wholesale funding costs. 

In his address to the Reserve Bank board dinner following the central bank’s decision to lower the cash rate by 25bps to 1.25 per cent, governor Philip Lowe urged credit providers to pass on the savings in full to mortgage customers.

Mr Lowe stated that in the past, the central bank has understood the circumstances dissuading lenders from moving in tandem with the REBA but said that current circumstances warrant a full cut.  

“My usual practice in answering this question has been to explain that there are a range of other factors that influence mortgage pricing, and then say ‘it all depends’,” he said.

“There are often reasonable explanations for why the standard variable mortgage rate does not move in lock-step with the cash rate.


“[However], I would like to break with my usual practice and provide a clearer answer. And that is: Yes, this reduction in the cash rate should be fully passed through to variable mortgage rates.”

The governor made reference to falling wholesale funding costs, which, following a spike in 2018, prompted lenders to lift variable rates out-of-cycle.

“Not only have these costs declined as a result of the change in monetary policy, but they have also declined because of movements in market-based spreads,” he said.

“Last year, these spreads increased and most lenders responded by increasing their standard variable rates by around 15 basis points. Over recent months, these spreads have reversed all the increase that occurred last year and returned to their 2017 levels.

“The result is that there has been a substantial reduction – at both the short end and the long end – in the cost of banks raising funds in wholesale markets. Average rates on retail deposits have also come down.”

He added: “This means that the lower cash rate should be fully passed through into standard variable mortgage rates. Full pass-through would also mean that the economy receives the full benefit of today’s policy decision.”

Several lenders, including all four major banks, have dropped their variable mortgage rates in response to the cash rate reduction.

CBA and NAB passed on the full 25bps cut; however, ANZ and Westpac did not move in lock-step with the RBA.

ANZ reduced all of its variable home loan rates by 18bps, while Westpac opted to cut variable owner-occupied (P&I and IO) and investor P&I rates by 20bps, and slashed investor interest-only rates by 35bps.

ANZ group executive, Australia retail & commercial, Mark Hand said the bank weighed up a number of factors before making a decision not to pass on the full 25bps cut, including business performance, market conditions and the impact on customers, including depositors.

“While we recognise some home loan customers will be disappointed, in making this decision we have needed to balance the increased cost in managing our business with our desire to provide customers with the most competitive lending and deposit rates possible,” he said.

David Lindberg, Westpac’s chief executive, consumer, said that the bank had taken “many factors into account” in making this decision, including balancing the interests of all stakeholders.

“We are operating in a historically low interest rate environment, which creates the opportunity for home owners to get ahead on their repayments. It is also a good time for first home buyers to get onto the property ladder with some of the lowest rates in the history of the Australian mortgage market available,” he said.

“At the same time, we understand there are some people doing it tough despite low interest rates, as growth in both wages and our economy remains low.”

ANZ and Westpac have already received criticism for their decisions not to pass on the full cut, with Treasurer Josh Frydenberg noting his disappointment.

More rate cuts ‘not unreasonable’

Governor Lowe has also flagged the possibility for further monetary policy adjustments over the coming months.  

Mr Lowe said that while the board “has not yet made a decision” as to whether to drop the cash rate further, “it is not unreasonable to expect a lower cash rate”.

The RBA governor noted that “at its core”, the board’s decision to cut rates on Tuesday was made to “support employment growth and to provide greater confidence that inflation will be consistent with the medium-term target”.

He added that the current policy setting may be able to achieve a “sustainably lower rate of unemployment” but did not rule out the need for further monetary policy stimulus.

“It is possible that the current policy settings will be enough – that we just need to be patient. But it is also possible that the current policy settings will leave us short,” he said.

“Given this, the possibility of lower interest rates remains on the table.

“Monetary policy does have an important role to play, and we have the capacity to play that role if needed.”

Market analysts are forecasting at least one additional rate cut before the end of the year, with some observers, including global investment bank JP Morgan, expecting the cash rate to fall to 0.5 per cent by mid-2020.

[Related: RBA makes cash rate move]

No excuses: RBA governor calls on banks to pass on full cut

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