Many to follow ANZ and Westpac on rates

George Lekakis Finance regulation

Politicians and consumer advocates last night poured scorn on ANZ and Westpac after both banks chose to fatten their lending margins instead of passing on the full benefit of the RBA’s official rate cut to home borrowers.

The Reserve Bank yesterday lowered the official cash rate by 25 basis points to a record low of 1.25 per cent in an attempt to revive consumer spending in Australia’s weakening economy.

Auswide, RACQ and Athena Home Loans were among the niche names quick to announce they will pass on full rate relief to borrowers.

ANZ was the first major bank to respond to the official rate move, announcing that it would lower variable home loan rates by only 0.18 per cent.

This decision provoked a swift and furious reaction from federal Treasurer Josh Frydenberg who questioned whether ANZ was serious about restoring public confidence in its decision making.

“This is deeply disappointing from ANZ,” he said.

“Actions like this don’t give the Australian people any comfort that the banks have changed their behaviour.”

ANZ’s partial repricing was something of a defiant act given that Frydenberg urged the bank’s chairman David Gonski and CEO Shayne Elliott at a meeting in Melbourne last Thursday to deliver customers the full benefit of the widely expected RBA cut.

The public fallout from ANZ’s decision could linger for some time as consumer advocates assess the financial impact the partial repricing is likely to have on home borrowers.

An analysis of ANZ’s repricing by financial services comparison site, Mozo, estimates that the withholding of seven basis points of rate relief from existing home borrowers will add $152.5 million to the bank’s revenue line over the next 12 months.

ANZ also is in line to save more than $13 million with its move to delay activating the partial cut by nine days.

Commonwealth Bank and NAB – the two banks whose reputations were comprehensively trashed during the hearings of the Hayne inquiry – yesterday promised to pass on the full 0.25 per cent rate cut to all existing and new home borrowers.

While ANZ bore the full brunt of the public backlash, ING appears to have escaped scrutiny of its move to pass on only a 17 basis point cut to new borrowers.

ING’s actions are potentially more egregious than those of ANZ and Westpac because thousands of home borrowers already servicing the Dutch-owned bank’s $50 billion Australian mortgage book are not in line to receive any rate reduction.

ING, which last month was crowned Australia’s most trusted bank at the Australian Banking Innovation Awards, decided to announce rate cuts to brokers on 29 May – six days ahead of the RBA meeting.

The bank’s failure to pass on rate relief to existing borrowers is set to boost its revenue line over the next 12 months by at least $15 million.

Westpac, which has chosen to pass on only a 0.20 rate cut to owner occupiers, minimised scrutiny after releasing details of its repricing late on Tuesday evening.

The country’s second largest lender could stir a controversy of its own because it intends to lower rates to interest-only investment borrowers by a whopping 0.35 per cent.

This move could stoke criticism that owner-occupier borrowers at Westpac are being forced to subsidise the more generous rate relief to be made available to property investors.

This will soon replay to the detriment of the industry.

Are interest rates going to be reduced further?

RBA governor Phillip Lowe posed the question in a speech last night.

“The answer here is that the board has not yet made a decision, but it is not unreasonable to expect a lower cash rate,” he said.

While arguable at the edges – for example, banks are losing the “free funds” benefit when rates decline, a dynamic that will be tough for many credit unions – Lowe stepped through the data that allowed him to take a turn at dictating terms.

“Yes, this reduction in the cash rate should be fully passed through to variable mortgage rates,” he said.
?Lowe said this was down to “recent reductions in bank funding costs. Not only have these costs declined as a result of the change in monetary policy, but they have also declined because of movements in market-based spreads.

“Last year, these spreads increased and most lenders responded by increasing their standard variable rates by around 15 basis points. Over recent months, these spreads have reversed all the increase that occurred last year and returned to their 2017 levels.

“The result is that there has been a substantial reduction – at both the short end and the long end – in the cost of banks raising funds in wholesale markets. Average rates on retail deposits have also come down.

“This means that the lower cash rate should be fully passed through into standard variable mortgage rates. Full pass-through would also mean that the economy receives the full benefit of today's policy decision.”