Sign banks gearing up to deliver rates shock out of sync with RBA

RBA governor Michele Bullock is expected to announce a cash rate cut. Picture: NewsWire / Nikki Short

Reserve Bank moves to slash interest rates this month could fail to materialise for homeowners as signs emerge some lenders may not pass on an “almost certain” cash rate cut today.

Anticipation of another RBA cut has been growing stronger over recent weeks, with 88 per cent of economists polled by comparison group Finder.com.au predicting a July drop in rates.

On the topic of cost-of-living crisis, an unexpected 44 per cent of experts claimed “it’s over.”

Some argue the cut is “locked in” given that inflation has been trending well below RBA targets, while consumer spending is in need of a boost after falling in recent months.

This month’s cash rate cut would be the third time the Reserve Bank has dropped the cash rate since February.

Banks quickly passed on the earlier cuts – with all but one passing on the February cut, and every lender passing on the May cut – but loan experts said banks may be more hesitant about the new cut.

Part of the reason is that some of their other costs have been on the rise, making the case for passing on the RBA cut weaker.

Canstar insights director Sally Tindall said banks would be less likely to pass on each new cut.

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Owl Home Loans director and broker Aidan Hartley said recent bank messaging to brokers has suggested some lenders may be gearing up to not pass the cuts on in full.

Mr Hartley pointed to industry communications where banks stressed that the Reserve Bank was not the only source of funding for them. He said the communications suggested banks were trying to adjust expectations around what they would be passing on.

“There is a high chance some lenders will not pass on the cuts,” he said.

“Recent messaging from banks has opened the door to them not passing on the cut … the cost of funding for banks will not be matching the (cash rate drop).

“Some lenders may not pass on the full cut. They will give the best rates to new borrowers, rather than existing customers.”

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Compare the Market’s David Koch said banks were not guaranteed to pass a cash rate cut on. Picture: Brett Hartwig

History also suggested banks were more reluctant to pass on the later cuts in a rate cutting cycle, he said.

“We saw this in the last rate cutting cycle. When rates were falling in 2019 and 2020, the big bank four banks only passed on about 80 per cent of each cut.”

THE BANKS LESS LIKELY TO PASS ON SAVINGS

One broker told The Daily Telegraph mid-tier lenders who aggressively chased market share prior to the February rate cut may be less inclined to pass on a July cut to customers.

Their earlier competitive variable rates meant there was less scope to pass on new cuts to existing borrowers and, for these banks, the focus was often on prioritising new customers, the broker said.

Compare the Market economic director David Koch agreed that there could be a mismatch between rates for new borrowers and existing customers.

“Banks are not obliged to pass on rate cuts, so discounts are never guaranteed,” Mr Koch said.

“And just because your rate might be reduced, it doesn’t necessarily mean you’re getting a good deal. It’s crucial homeowners be vigilant, to make sure their rate remains competitive.

“We know (rates for new customers) are often much more enticing than the rates available to older customers.”

Finder.com.au head of consumer research Graham Cooke said some banks could hold back on passing on new cuts to protect their margins.

“Lenders are fighting against each other in an increasingly competitive market. This has been great for consumers, who have received maximum savings (so far),” he said.

“What remains to be seen is if that continues. The RBA’s previous cutting cycle (2019-2020) saw a total reduction of 125 basis points across five cuts, but the big four only passed on 86 basis points to customers on average.

“Banks would argue that their costs do not necessarily go down proportionally as rates decrease. So I would say we will likely start to see some lenders pulling back as rates continue to drop.”

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Rachel Wastell, Mozo Money personal finance expert, pointed out that banks had passed on all 13 rate hikes between 2022 and 2023.

Mr Cooke said the first bank to break ranks with the RBA would likely be in the firing line of public opinion but such a move could smooth the way for other lenders to do the same.

MOVE THAT WOULD OPEN ‘FLOODGATES’

Canstar data insights director Sally Tindall said she expected banks to pass on a July cut in full but she said the likelihood of banks holding some of the savings would increase with subsequent cash rate cuts.

“If the cash rate continues to fall, then banks could decide not to pass on each cut in full,” she said.

“Alternatively, they could decide to hand out a smaller cut to particular types of borrowers.

“If a decent-sized bank takes the fall by not passing on a cut in full, the next time around, other lenders could well follow … If a big bank breaks ranks then the floodgates will well and truly be open.”

Mozo money expert Rachel Wastell said the case for banks to pass on the cut from a customer welfare point of view was strong given that there were 13 rate hikes between 2022 and 2023.

US President Donald Trump’s economic policies have created an air of global uncertainty that has paved the way for Aussie rate cuts. Picture: Getty Images

“With more cuts expected, most lenders are facing the same challenges – tight margins, limited wiggle room and strong competition,” she said.

“Banks may be worried about profit margins, but for borrowers this isn’t about profits. It’s about staying out of the red. If cuts don’t come from your lender, switching might be the way to get a better deal.”

Mr Koch said he expected most banks to pass the discount in full but he pointed out that there was a high disparity between what rates lenders were offering.

“Compare the Market has found there can be a 0.50 per cent difference between some advertised rates, so you can effectively create your own rate cut by shopping around. That could represent a saving of $210 on monthly repayments – or $2,520 over a year – for someone with an average $660,000 loan.”

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