The RBA is set to cut interest rates on Tuesday. But will the banks pass the cut in full or at all? Picture: iStock
The RBA is set to cut interest rates on Tuesday. But will the banks pass the cut in full or at all? Picture: iStock

EXPLAINED: What Reserve Bank interest rate cut means for you

COMMONWEALTH Bank has passed on the RBA's interest rate cut to customers in full.

It follows ANZ bank defying pressure from Treasuer Josh Frydenberg and delivering only a partial cut.

ANZ this afternoon said it would reduce its variable home loan rates for both owner-occupiers and residential property investors by 0.18 percentage points.

The announcement follows the RBA cutting the nation's cash rate by 0.25 percentage points to a new historic low of 1.25 per cent.

 

Federal Treasurer Josh Frydenberg meets with Commonwealth Bank CEO Matt Comyn, at the Commonwealth Parliamentary Offices in Melbourne. Picture: Stuart McEvoy/The Australian.
Federal Treasurer Josh Frydenberg meets with Commonwealth Bank CEO Matt Comyn, at the Commonwealth Parliamentary Offices in Melbourne. Picture: Stuart McEvoy/The Australian.

 

Treasurer Josh Frydenberg said ANZ had "let down" its customers after the bank's decision not to pass on the Reserve Bank interest rate cut in full.

"I think the ANZ has let down its customers," he told a press conference.

"This is deeply disappointing from the ANZ. We heard from commissioner Hayne just months ago that the banks were putting profits before people.

"Actions like this don't give the Australian people any comfort that the banks have changed their behaviour.

"And as Treasurer of Australia I have made it very clear to the banks that the public have a legitimate expectation that they will see the full benefits of rate cuts such as announced by the RBA today."

ANZ CEO Shayne Elliot. The bank has refused to pass the RBA’s latest rate cut on in full  to customers.
ANZ CEO Shayne Elliot. The bank has refused to pass the RBA’s latest rate cut on in full to customers.

ANZ Australia retail and commercial group executive Mark Hand said the bank had "weighed up" a number of factors in making the decision, including business performance, market conditions and the impact on depositors.

"While we recognise some home loan customers will be disappointed, in making this decision we have needed to balance the increased cost in managing our business with our desire to provide customers with the most competitive lending and deposit rates possible," Mr Hand said.

"Home loan customers looking for certainty with their repayments can look to lock in our historic low fixed rate home loans for our two and three year terms."

The decision by ANZ to keep some of the cut comes despite federal treasurer Josh Frydenberg urging the banks to pass any cut in full prior to today's RBA board meeting.

The Reserve Bank has finally cut interest rates to a new historic low, breaking its longest ever streak without a change.

The move comes after Treasurer Josh Frydenberg met with bank bosses yesterday to encourage them to pass on the rate cut in full, to help stimulate the economy.

Realestate.com.au chief economist Nerida Conisbee believes banks will pass on Reserve Bank rate cuts in full. Picture: Supplied
Realestate.com.au chief economist Nerida Conisbee believes banks will pass on Reserve Bank rate cuts in full. Picture: Supplied

Economists predicted the RBA rate cut at its monthly board meeting on Tuesday. Many expect a second rate cut in August, and some expect more.

Many economists, including those at Westpac, ANZ and JP Morgan, expect at least one more 25 basis point cut to be delivered by November.

It is the first time the cash rate has moved under RBA governor Philip Lowe who took over the role in September 2016.

Prior to today's meeting the RBA had held the cash rate steady for 33 consecutive months.

The new cut, combined with another likely cut soon and recent regulator moves to help with mortgage serviceability, will dramatically boost households' borrowing power.

Research group Canstar has found an average wage earner would be able to borrow an extra $32,000 - up from $363,000 to 395,000 - if the changes go through as expected.

Banking regulator APRA currently requires banks to base borrowers' mortgage serviceability stress tests on an interest rate of around 7.25 per cent, but has proposed that this change to 2.5 per cent above the standard variable rate.

Canstar's Mr Mickenbecker said the move would "add a lot of borrowing power".

"Given that prices have come down, it means more people will qualify for a loan that they previously could not have qualified for," he said.

Big questions are now facing households. Why are interest rates falling? How low will they go? Should borrowers fix or stick with variable rates?

 

Shane Oliver from AMP. Picture: Supplied
Shane Oliver from AMP. Picture: Supplied

 

But the most pressing question is whether banks will pass on the full rate cut to borrowers, after pocketing more than 1 per cent of the 3.25 per cent of RBA rate cuts since 2011.

Realestate.com.au chief economist Nerida Conisbee said there had not been an RBA rate cut since 2016 and there was an expectation that the full 0.25 per cent cut would be passed on.

"People are feeling pretty negative towards the banks after the royal commission," she said, adding that banks would want to "improve consumer sentiment towards them".

AMP Capital chief economist Shane Oliver also believes banks will pass on all or most of the

RBA cut to customers, but RateCity research director Sally Tindall isn't so sure.

"The last time the RBA cut rates the big banks passed on just under half," Ms Tindall said. "I'm not expecting them to pass it on in full."

Tuesday's decision is the start of a fresh period of interest rate action, so here's what consumers need to know.

WHY THE CUTS?

The RBA uses interest rates as a lever to keep the economy growing steadily.

It says a two to three per cent range for Consumer Price Index inflation is ideal to "encourage strong and sustainable growth in the economy".

Rate rises are designed to put the brakes on inflation while rate cuts are like an accelerator.

Two RBA cuts means average mortgage customers are likely to save at least $100 a month on their repayments.
Two RBA cuts means average mortgage customers are likely to save at least $100 a month on their repayments.

Annual inflation is running at 1.3 per cent despite record low interest rates and Ms Tindall said this, combined with rising unemployment and weak wages growth, created a trifecta that needed to be fixed.

"They have got to act to get out of this, and need to inject some life into the economy," she said.

The RBA has delivered 13 straight cuts - including a 50 basis point cut in May 2012 - since November 2011.

The downward trend has taken the nation's official cash rate from 4.75 per cent to its new low of 1.25 per cent.

The cash rate was last raised in November 2010.

HOW MUCH WILL THEY FALL?

Most economists expected the official cash rate to drop from 1.5 per cent to 1.25 per cent today, and then to 1 per cent in August.

Some - including Westpac's Bill Evans - predict three cuts by November.

Two RBA cuts means average mortgage customers are likely to save at least $100 a month on their repayments.

"It will be common for us to see home loan rates with a "2" in front of them by the end of this year," Ms Tindall said.

Greater Bank became the nation's first bank to do this last week when it announced a one-year fixed rate of 2.99 per cent.

People are feeling pretty negative towards the banks after the royal commission. Banks would want to change that.
People are feeling pretty negative towards the banks after the royal commission. Banks would want to change that.

WINNERS AND LOSERS

People with variable rate mortgages - particularly new home loan customers - are the biggest winners from a rate cuts, which lower their cost of borrowing.

On the flip side, those saving for a new home will receive a paltry return on their bank deposits, while retirees who rely on cash in the bank will also suffer.

IMPACT ON HOUSING

Ms Conisbee said the rate cut would have a positive effect on the housing market, with history showing that cuts had an immediate effect on search activity on realestate.com.au.

"It gives people more money to buy and more confidence in the market," she said.

A rate cut, combined with regulator plans to soften borrowing rules and Labor's election loss spelling the end of negative gearing tax changes, would be "enough to stop the fall in prices we have seen".

An interest rate cut would help the national housing downturn bottom out.
An interest rate cut would help the national housing downturn bottom out.

Landlords, with extra cash in their pockets and no worries about tough new taxes, are unlikely to raise rents sharply as was feared under a potential Labor government.

Dr Oliver said low interest rates would help the national housing downturn bottom out and "next year I would assume pretty flat property prices".

"I don't think it will set off another housing boom because household debt is much higher than when they started cutting rates in 2011," he said.

FIXED OR VARIABLE?

RateCity's Ms Tindall said deciding whether to choose a fixed or variable rate loan depended on personal preferences.

"Do you like the idea of knowing exactly how much your fixed repayments will be?" she said.

"With fixed rates you may miss out on another RBA rate cut or two, but if you don't fix you may be subjected to out-of-cycle rate hikes by your bank."

Borrowers can also choose a part-fixed, part-variable loan.

InfoChoice CEO Vadim Taube said borrowers could organise a large interest rate cut for themselves just by comparing their own mortgage rate with the best rates now in the market.

"Many borrowers are now paying 4.5 per cent plus on their home loan," he said.

"By refinancing to a loan around 3.5 per cent a borrower would be give themselves the equivalent of four RBA rate cuts of 0.25 percentage points each."

SEVEN TIPS IF YOU HAVE A RATE CUT

*Take a deep breath. There's no need to rush any decisions because more rate cuts are likely.

*Find out what mortgage interest rate you are paying.

*If it's more than 4 per cent for an owner-occupier principal and interest loan, seek a better deal.

*Research other banks' mortgage rates using online comparison websites or phone calls.

*Banks offer new customers better rates so ask your lender to match or beat that rate.

*Consider speaking with a mortgage broker who can find good home loan deals.

*RateCity says: "Now is an excellent time to have the discussion because banks are desperate for new customers. Turn yourself from an existing customer into a new one."