Our “Big Four” banks didn’t pass on the latest rate cut in full. They’ll pass on even less of the forecast next one. Why? It’s a mixture of economics and you.
Until customers start demanding better deals — and switching to providers that offer them — banks won’t change.
And they won’t be forced to do what so many other businesses have to do: trim profit margins to woo customers and deal with competition.
This week the Reserve Bank of Australia lowered its cash rate to 0.75 per cent, the first time it’s ever gone below 1 per cent.
It’s a rate that banks use when buying and selling money to each other.
The cash rate is the amount banks will pay their supplier for a short-term purchase to have enough stock for the next day.
The rate goes on to influence other interest rates, such as mortgages, which is why it’s so closely watched.
Although the Reserve Bank cut the rate by 25 basis points to just 0.75 per cent, none of the largest four banks passed it all on.
NAB and Westpac announced they would cut variable rates by 0.15 percentage points, ANZ went with 0.14 points and the Commonwealth Bank just 0.13 percentage points.
Banks don’t want negative margins
Moody’s Investors Service vice president Frank Mirenzi said the banks were not passing on rate cuts in full simply because it would cost them more money.
More than half the money banks lend comes from depositors — such as people putting money in savings accounts and term deposits.
Getting money from elsewhere is more expensive.
“If they pass on more of the rate cut to borrowers than they do to the depositors, then that’s negative for the bank margins and that’s negative for profits,” Mr Mirenzi said.
While mortgage-holders will feel some benefit, people who rely on interest from their savings will see their payments crimped.
Already one-third of the deposits banks hold, such as transaction accounts, accrue no interest.
And few can foresee a time when Australian banks move to negative interest on savings — essentially charging people to hold their money.
All this means that even though more cuts to the cash rate are forecast, people with mortgages will feel less benefit because banks will be working to keep their profits from sinking.
“As official rates get lower and lower it becomes more difficult [to pass it on],” Mr Mirenzi said.
“Because as rates get lower it means the margins for the banks get squeezed and it means their profits get lower and lower. Every time the RBA cuts rates, that puts pressure on their margins.”
Rage and fury has no impact
The Federal Government was outraged that the rate cuts were not passed on in full but has no power over how the banks — or the central bank — set their rates.
“They never learn,” Prime Minister Scott Morrison said in a TV interview, shaking his head lightly.
“They honestly never learn, and it’s disappointing.”
The banks do learn a bit.
Last time the rate cut was announced, ANZ announced within ten minutes that it wasn’t passing on the full cut. It got clobbered.
This time, the bank waited for more than a day after the announcement — later than all its major competitors — to do the same thing again but without all the screaming.
“People have a reason to be disappointed in the banks basically profiteering,” Mr Morrison said.
Treasurer Josh Frydenberg also lashed out at the big four banks — the bogeymen of Australian business who, in the minds of the Australian people, are about as popular as parking inspectors.
He went further than the Prime Minister, name-checking a small lender passing on the whole cut and suggesting customers break up with their bank.
“The banks have a lot of explaining to do,” Mr Frydenberg told Channel Nine’s Today program.
“Because this is very disappointing by the banks. Customers should vote with their feet.”
However, while we happily change mobile phone providers when we’re unhappy with service, we rarely do so with our banks.
The adage in banking is that people are more likely to change their spouse than their bank, although technological changes such as “open banking” will make switching accounts easier.