Falling Funding Cost Pressures Banks to Pass RBA Rate Cuts in Full

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By Vittorio Hernandez | January 14, 2013 9:55 AM EST

There is now more pressure for Australian banks to pass in full to borrowers any overnight cash rate cuts that the Reserve Bank of Australia (RBA) would make in 2013.

Nine News reported that Commonwealth Bank (ASX: CBA) raised a total this week $2 billion from overseas investors the past three years at a cost substantially lower than what it paid in 2012. As a result, CBA will pay investors 44 basis points higher than the U.S. benchmark rate, lower than the 140 basis points the bank paid in 2012 to issue five-year bonds.

However, analysts have warned borrowers not to expect too much from the banks, particularly the big four which kept 5 basis points out of the 25 basis points rate cut made by the Australian central bank in its December rate decision.

The analysts pointed out that the banks could also cite high deposit interest rates as the lenders' justification in not passing rate cuts in full.

While passing rate cuts in full remains a debatable question, most of the banks agree there would likely be more rate cuts in 2013.

Economists from the National Australia Bank (ASX: NAB) believe official cash rates would be reduced by 0.75 per cent his year due to the weakening Aussie economy and rising unemployment rates. With three forecast rate cuts, the overnight cash rate is expected to plummet to an all-time low of 2.25 per cent by the end of the third quarter.

NAB initially forecast only one rate reduction this year but revised their projection to three, which would likely be 25 basis points each in March, May and August.

Along with the prediction of lower interest rates, NAB group chief economist Alan Oster foresees Australia's economy growing at a slower rate of 2 per cent in 2013, down from the bank's previous forecast of 2.5 per cent growth rate.

ANZ Bank (ASX: ANZ) believes the RBA will make its first cut in March, while Westpac (ASX: WBC) foresees only one 25-basis points rate cut this year and CBA is hopeful there would be none and the benchmark lending rate would remain at 3 per cent.

Joining the call for Australian banks to pass additional cuts on overnight cash rates is the retail industry. Russell Zimmerman, director of the Australian Retailers Association, said the savings of the lenders from lower cost of money should be passed before the next RBA policy meeting on February.

He pointed that while Canada, New Zealand and Norway have reduced their key lending rates to 1 per cent, 2.5 per cent and 1.5 per cent respectively, Australia 3 per cent rate is relatively high in comparison to the three despite the rate being a three-year low.

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