Banks under pressure to pass on any RBA rate cut in full

“I expect all banks to pass on the benefits of sustained reductions in funding costs,” he said.

Markets and economists are expecting the cut in interest rates after RBA governor Philip Lowe used a major address last month to argue the country had to “do better” than the current jobless rate of 5.2 per cent.

The RBA believes there is no impediment to the commercial banks passing on all of the cut.

Minutes from its most recent board meeting noted that “funding costs for the major banks had declined to record lows”, with rates on fixed-term mortgages already starting to fall.

But Credit Suisse analyst Jarrod Martin said there was a less than 50 per cent chance that a quarter percentage point official rate cut would be passed on to borrowers in full.


He pointed out that when rates were last reduced, the big banks cut their mortgage rates by between 0.1 and 0.15 percentage points.

Financial markets are expecting another cut in official rates later this year, and Mr Martin said it would become increasingly difficulty for banks to pass these on in full to borrowers because low interest rates tended to crunch banks’ profit margins.

“If there’s an additional cut, it will get increasingly hard to pass through any more than half,” he said.

Bell Potter analyst TS Lim also said it would be “hard” for banks to pass on a 0.25 percentage point cut in full to home loan customers due to the pressure on their profit margins.


Mr Lim said banks would not be able to cut the rates they paid on deposits by a quarter percentage point, which made it difficult to cut lending rates by this amount.

Credit ratings agency Standard & Poor’s said banks had “limited flexibility” to lower their lending rates, because official interest rates set by the RBA had only a partial influence on banks’ overall funding costs.

The last time the RBA cut rates it helped underpin a lift in house prices across Sydney and Melbourne that ended in the second half of 2017, with values tumbling since then.

Figures from CoreLogic on Monday confirmed that despite the market stabilising, dwelling values fell another 0.4 per cent in the nation’s capital cities to be down by 8.4 per cent.

House values in Sydney dropped 0.4 per cent to be 11.6 per cent down since May 2018 while in Melbourne they fell 0.6 per cent to be 12.6 per cent lower over the past 12 months.

Profits in the mining sector jumped by 5.2 per cent through the March quarter to be up 22 per cent over the past year.Credit:Louie Douvis

ANZ’s measure of job advertisements, also released on Monday, showed an 8.4 per cent fall in May but the bank put this down to the left-over effect of the Anzac Day-Easter break. It noted that advertisements had picked up in the week after the May 18 federal election.

Separate figures from the Australian Bureau of Statistics, however, pointed to ongoing weakness in parts of the economy.

Sales by manufacturers slipped by 1.4 per cent in the March quarter while those out of the mining sector fell by 0.6 per cent.

Profits in the mining sector jumped by 5.2 per cent through the March quarter to be up 22 per cent over the past year. Most of the increase is coming from much higher prices for iron ore, with actual production largely flat.

But profits for those outside mining fell by 0.4 per cent in the quarter and stand just 0.3 per cent better over the past 12 months. Arts and recreation, real estate and construction firms all reported sizeable drops in profit over the quarter.

JPMorgan senior economist Sally Auld said even with planned tax cuts starting in the first half of 2019-20, the RBA was locked in to further interest rate reductions.

“If Dr Lowe now sees an unemployment rate below 5 per cent as both sustainable and necessary, then further easing is required (beyond this week) to sufficiently stimulate domestic demand,” she said.

Shane is a senior economics correspondent for The Age and The Sydney Morning Herald.

Clancy Yeates is a business reporter.

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