Reserve May Cut Rates, Banks Might Not Follow

The Age

Saturday August 9, 2008

By Ian McIlwraith, Daniella Miletic and Mary-Anne Toy

TWO of Australia's largest banks, Westpac and ANZ, have warned that they may not fully pass on any cut in interest rates by the Reserve Bank.

Westpac's new chief executive, Gail Kelly, the ANZ's mortgage chief, Michael Rowland, and BankWest's head of retail banking, Ian Corfield, said yesterday that any reduction in home lending charges would depend on market conditions.

Their comments came after Prime Minister Kevin Rudd encouraged Australians to switch banks if theirs did not pass on interest rate cuts that the Reserve is expected to announce.

A growing number of economists predict the Reserve may reduce interest rates starting next month, with up to 0.5 percentage points cut before year's end. The Reserve indicated this week that it felt it had choked off the rise in inflation, leaving scope for lower rates.

Signs that market conditions have eased a little emerged yesterday afternoon, when ANZ announced its fixed-term mortgage rates would fall by up to 0.5 percentage points from Monday. Its one-year fixed rate will fall by 11 basis points to 8.99% and the seven-year rate by 50 basis points to 9.39%.

At a parliamentary inquiry earlier yesterday, ANZ did not guarantee it would completely pass on any potential cut in rates by the Reserve. Like Westpac and BankWest, its stance suggests it is resisting pressure from the Federal Government.

Mr Rudd said yesterday his Government had introduced changes making it much easier for consumers to switch accounts if they were unhappy.

"If the banks are not going to do the right thing, we're trying to make it possible for consumers to vote with their feet," Mr Rudd said. "I say to the commercial banks in Australia that they have a responsibility to ensure that action by the Reserve Bank is reflected in the interest rate posture adopted by these commercial banks."

Asked yesterday if she had had any direct conversation with the Government on rates, Ms Kelly said that while there was frequent communication with the Government, there had been "no particular conversation over recent times".

Speaking at a briefing to banking analysts and media on Westpac's profit outlook, Ms Kelly said she would "love to" pass on any rate cut, but that the extent of such a cut would be balanced between the competing effects of how much it was costing the bank itself to borrow the money to lend, what its competitors were doing, and the effect on customers.

"Clearly, we would love to pass through the full 25 basis point drop if that were to occur . . . but we'll need to factor in all of those issues at that time."

In the past year, as the Reserve raised rates, the banks passed on the full amount of each increase - and in most cases an additional amount to compensate for the higher cost to them of borrowing the money in a global marketplace that has been rocked by the collapse in US mortgage-related securities.

Banks have argued that they never fully passed on the increased cost of borrowing and there is an expectation they will be slow to give back any cut in rates in a bid to improve their profitability for shareholders.

Speaking in Melbourne at the parliamentary inquiry into banking competition, the ANZ's Mr Rowland said the bank would like to cut interest rates "as quickly as possible" but would first have to assess funding costs.

"The strongest indication I can give you is that we want to pass on an interest rate cut, if funding costs allow. I can't be any clearer than that. At the end of the day, we're a commercial organisation," he said.

He likened a Reserve cut to a drop in the price of an ingredient in the overall cost of baking bread. "The cost of baking a loaf of bread has gone up, we haven't passed that fully on to our customers, the extent to which reduction in a portion of the ingredients of that loaf of bread dropping - yes, we would like to pass that on - but that doesn't necessarily mean we can reduce the total loaf by the amount of a reduction of a part of that."

BankWest's Mr Corfield expressed similar sentiments.

"We have to make those funding decisions based on the blend that we have got in the book at the time," he told the inquiry.

© 2008 The Age

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