Australian Bankers' Association says banks justified in not passing on rate cuts in full

The Australian Bankers’ Association (ABA) has defended the past decisions by its banking members not to pass on cash rate cuts in full in a seemingly pre-emptive advisement ahead today’s forecast 25 basis point rate cut by the RBA.

Banks are expected to pass on around 20 basis points to borrowers with a now familiar consumer, media and political backlash likely to follow.

Ahead of today's announcement, Steven Münchenberg, chief executive of ABA, says the Reserve Bank has ttself acknowledged that funding costs have increased by 50 basis points over the past year, with banks absorbing some of this increase themselves.

“The Reserve Bank understands the cash rate is just one component of the true cost of banks’ funding and therefore does not expect banks and other lenders to exactly match every cash rate movement,” says Münchenberg.

“The Reserve Bank Board takes into account what borrowers are actually paying in the marketplace for loans and what they are receiving on deposits when making their decision.”

“Banks are facing higher funding costs mainly due to the competitive rates being paid on deposits.”

Münchenberg says customers should shop around for the best home loan deal, pointing out that banks routinely offering discounts of around 70 basis points off the advertised standard variable rate to approved customers.

However, he failed to explain how banks can offer these discounts in a higher funding-cost environment.

Münchenberg said that prior to the GFC, term deposits were priced on average 200 basis points below the cash rate. Now, they are 20 basis points above the cash rate.”

“While interest rates on deposits remain attractive and competitive for savers, when combined with the cost of wholesale funding, deposits continue to put pressure on the overall cost of funds for banks.”

He pointed to the most recent Statement on Monetary Policy, where the Reserve Bank noted that “bank funding costs – relative to the cash rate – have risen by about 50 basis points over the past year…[which] largely reflects the increased cost of deposits.”

“The Reserve Bank cash rate has reduced 150 basis points since November last year, but with banks, credit unions and building societies facing real funding cost pressures, not all of that has been passed on. The Reserve Bank calculates that the major banks have cut standard variable home loan rates by an average of 115 basis points.”

“For small business lending backed by residential security, banks have passed on more of the cash rate cuts, reducing the average loan by up to 120 basis points.”

“While the Reserve Bank has identified that average funding costs have increased by 50 basis points, banks have only passed on 30 – 35 basis points to most home and small business borrowers.”

“At the same time, banks have only passed on about half the cash rate cuts to savers with term deposits.”