Why don't banks pass on the full rate cut?

December 14th, 2012

The most recent drop of .25 basis points has not been passed on in full by the major banks. By not passing on the full cut when interest rates are on the decline, the banks take up an opportunity to increase their profit margins without upsetting consumers too much, who are still receiving a discount.

Some industry commentators have claimed that the banks are justified in doing this. The Australian Banker's Association have recently come out in defense of banks, stating they are justified in not passing on the full rate cut, as lending costs have increased.

Simon Müchenberg, Chief Executive of the ABA, stated that lending costs for banks have increased by up to 50 basis points in the last year.

'The Reserve Bank understands the cash rate is just one component of the true cost of banks' funding, and therefore does not expect banks and other lenders to exactly match every movement,' said Mr Müchenberg.

Lending costs for banks are dependent on overseas markets. For every dollar Australian banks lend out, 33 cents must be sourced from overseas. With many global markets still suffering the effects of the GFC, overseas institutions are tighter with their lending and money has become more expensive.

There are mixed opinions as to whether or not the banks are simply using dropping interest rates as a way of increasing profits, or are genuine in their claims of increased costs.

Josh Fear, Social Researcher at the University of Canberra, proposed that banks guarantee an interest rate margin that must remain constant over the life of the loan, and that the government should step in to enforce it, as a way of ensuring that banks do not exploit consumers.

Despite these claims, banks have had no hesitation in slashing interest rates on term deposits and high-interest accounts. Over the last six months, the average interest paid on these accounts has dropped from 5.65 to 4.60 per cent.

Treasurer, Wayne Swan, spoke out against the banks' failure to pass on the full rate cut.

'As I've said repeatedly, I don't believe that there is any justification for banks to hold back interest rates in the present financial environment,' said Mr Swan in a recent opinion column.

Prime Minister, Julia Gillard, agrees. 'The banks should pass on in full any rate interest rate reduction if it is made,' said Ms Gillard, shortly before the most recent RBA announcement.

Consumer groups are urging borrowers to move on to a different lender if their bank has not passed on the full rate. Choice claims that with 80 per cent of the business, big banks don't have to pass on the full rate cut. Borrowers may be more likely to get a better deal with a smaller lender.

If you're unhappy with your banks' current interest rate, contact your broker to discuss your options.