Big Four Make No Promises To Pass On Interest Rate Cut

The Age

Thursday October 2, 2008

Vanessa O'Shaughnessy and Eric Johnston

AUSTRALIAN banks have said they will pass on interest rate cuts if they can, but emphasise that official interest rates are not the only influence on standard variable mortgage rates.

In August, banks flagged their intentions regarding the anticipated September rate cut. And they followed through, reducing interest rates by at least a quarter of a percentage point when the Reserve Bank of Australia cut rates from 7.25% to 7%.

But in volatile markets the country's big four banks have declined to pre-empt the RBA's October decision.

The market is convinced the RBA will cut rates by a quarter of a percentage point on Tuesday, and suspects the central bank may even cut rates by half a percentage point.

Yesterday the Australian Bankers Association hit back at those who have suggested that that banks should pass on any rate cut, regardless of their cost of funding.

"Banks only collect about half their funding from deposits, the rest is borrowed in wholesale capital markets, including 25% from overseas," the association said in a statement.

"The cost of these wholesale funds has risen well over increases in the cash rate, and in the last few weeks have spiked to new record levels.

"Since August 2007, changes in the Reserve Bank's cash rate have not been a good proxy for changes in banks' actual cost of funds."

ANZ chief executive Mike Smith recently told a business audience it was in "no one's interests to keep rates high", but would not commit to passing on the entire rate reduction if the central bank cuts rates.

"I want to reduce rates as well. You know it's better for my customer bases, better for the low portfolio overall. The stress that high rates give is good for nobody. However, I have to thumb the book and I'm running a business," Mr Smith said.

Since the start of the year, the big four banks have added as much as 60 basis points to interest rates on top of the moves by the RBA as they have tried to claw back a sharp jump in wholesale funding costs.

© 2008 The Age

Back to News Index | Back to Home