Further RBA rate cuts unlikely to help borrowers

Last month, the Reserve Bank of Australia (RBA) cut the cash rate for the first time in nearly three years, resulting in a record low rate of 1.25%. This afternoon, the RBA board will convene once again, with many predicting the outcome to be a further reduction of 25bps to a flat 1%.

“The big question now is how much would actually get passed on? At the very least, I’d expect a couple of the big four won’t pass through the full cuts again,” said CoreLogic research analyst, Cameron Kusher.

He explained that while banks have historically passed reductions through to customers in full, benefitting their clients and placating wider industry expectations, that was before the financial crisis.  

“The lending landscape has changed quite a lot since then. Banks have had to do more to protect their margins. Ultimately, the banks answer to their shareholders. They do answer to their customers as well, but they’ve got to run a business and they’ve got to run it as efficiently as they possibly can and make a profit,” said Kusher.

There was public outcry when some of the majors failed to pass on the full cut last month – even Treasurer Josh Frydenberg got involved. However, Kusher doubts that additional reductions to the official interest rate, whether later today or later this year, would carry a significant benefit for borrowers anyway.   

“At this level, I don’t know that cutting interest rates will have as big of an impact on mortgage holders as it did when interest rates were much higher. I don’t think they have the same impact as they had previously, because lending policies are overall much tighter.”

The analyst also highlighted that in making their interest rate decisions, banks must consider savers as well as mortgage holders.

“To date, it’s generally been the savers that have been slugged, but you have to ask how much more they can do that given how low interest rates on saving accounts now are,” Kusher explained.

“The lower interest rates hurt savers and disincentives saving.  Given cuts to interest rates for savers have been much greater than cuts to interest rates for mortgage holders, and that savers are not that much of a smaller cohort than mortgage holders, it is reasonable for lenders to have greater consideration of the impact of the current ultra-low interest rates on this segment of the market.”