RBA Confirms: Borrowers Don't Pay More When Banks Hold Back on Interest Rates

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By Christine Gaylican | December 6, 2012 5:32 PM EST

The Australian Bankers' Association (ABA) said the Reserve Bank of Australia (RBA) has again confirmed that Australian households and borrowers are not paying more for their mortgages and business loans even though banks do not pass on RBA cash rate cuts in full. 

"Once more, the RBA has made this point clear.   Mortgage rates today are broadly where they would be, regardless of whether banks pass on rate cuts in full or not." says Mr. Steven Münchenberg, Chief Executive of the ABA, said after the Australian Business Economists Annual Conference Dinner on Wednesday:

Deputy Governor of the RBA, Philip Lowe, noted that banks' funding costs, and hence mortgage rates, have risen relative to the cash rate:

"As we have noted many times, the Board of the RBA has taken account of this in its monthly policy decisions. As a result, the cash rate today is around 1½ percentage points lower than it otherwise would have been. The fact that the Bank has offset the effect of higher funding costs on lending rates means that the normal level of the cash rate is lower than it otherwise would have been."1

Mr. Münchenberg says that "this makes it clear that, even if the banks had passed on all RBA rate cuts in full, mortgage rates would be the same as they are today, because the cash rate would be 1.5 percentage points higher, at around 4.5%."

Mr. Lowe confirms this in reported comments that: "..mortgage rates are where we think they broadly should be."2

The argument that Australian families or businesses are paying more because banks, credit unions and building societies have not passed on all rate cuts in full is fallacious.

Mr Münchenberg adds: "The RBA has also confirmed that, recognising banks' funding costs have risen over the past few years relative to the RBA's cash rate, the RBA does not expect Australia's banks, credit unions and building societies to always pass on RBA rate cuts in full.  There is a strong expectation in the community, reinforced by politicians, that banks should always follow the RBA, despite the RBA repeatedly stating that it does not expect banks to do this."

Mr Lowe points out that there had been "....some lessening of the pressure on bank funding costs."3 On deposits, the main driver of funding cost "Perhaps we are seeing some very early signs of the very intense competition in the deposits market easing off a fraction."4 

In its most recent detailed analysis of banks' funding costs, prior to this week's rate announcement, the RBA noted that banks' funding costs had risen 50 basis points relative to the cash rate over the twelve month period, of which banks had passed on 35 basis points to households with mortgages and only 30 basis points to small business borrowers where loans are secured by residential property.  Even after this week's announcements, banks continue to absorb some of the higher funding costs.

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