Lenders begin to pass on RBA rate cut

On Tuesday afternoon (4 June), the Reserve Bank announced that it was dropping the official cash rate for the first time in almost three years in order to “support employment growth and provide greater confidence that inflation will be consistent with [its] medium-term target”.

The central scenario remains for the Australian economy to grow by around 2¾ per cent in 2019 and 2020 – with underlying inflation to be 1¾ per cent this year, 2 per cent in 2020 and a little higher after that.

Speaking after the RBA’s monetary policy board meeting, RBA governor Philip Lowe said that the board had decided to lower the cash rate by 25 basis points to 1.25 per cent.

This marks a new historic low and the first time that the cash rate has moved since August 2016.

Mr Lowe stated: “[This] decision to lower the cash rate will help make further inroads into the spare capacity in the economy. It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target.”

He also noted that while global financial conditions “remain accommodative” and the outlook for the global economy “remains reasonable”, there are “downside risks” stemming from the trade disputes [that] have increased and growth in international trade remains weak.

Further, he added that recent inflation outcomes “have been lower than expected and suggest subdued inflationary pressures across much of the economy”.

However, Mr Lowe also noted that employment growth has been strong, labour force participation has been increased, mortgage rates remain low and there is “strong competition for borrowers of high credit quality”.

The RBA governor concluded that the board will therefore “continue to monitor developments in the labour market closely and adjust monetary policy to support sustainable growth in the economy and the achievement of the inflation target over time.”

Lenders begin cutting rates

Following the official cash rate reduction, several lenders immediately announced rate reductions across standard variable rates (SVRs) on their mortgages.

Auswide Bank will be amongst the first lenders to reduce its rates on some of its products by the full 25 basis point interest rate reduction.

The non-major bank announced it would be dropping its RBA rate tracker home loan and low rate Visa credit card products to 3.74 per cent and 9.20 per cent, respectively, from this Thursday (6 June). The credit card interest rate will apply for both purchases and cash advances.

The rate tracker home loan and low rate Visa credit card are both specifically tied to the RBA cash rate.

Non-bank lender Athena Home Loans and member-owned lender RACQ were also quick off the blocks, passing on the full 25bps cut.  

Co-founder and CEO of Athena, Nathan Welsh, commented: “Athena is passing on the full RBA rate cut to borrowers immediately.

“Borrowers deserve better than the lags by big banks in passing on the benefit.”

NAB and CBA pass on the full rate

In terms of the major banks, both NAB and CBA have announced that they would pass on the full 25 basis points to customers.

From Friday, 14 June 2019, NAB will reduced its owner-occupied (OO) principal and interest (P&I) rate to 5.11 per cent, its OO interest-only (IO) SVR to 5.68 per cent, its investor P&I SVR to 5.71 per cent and its investor IO SVR to 6.16 per cent.

Mike Baird, NAB’s chief customer officer - consumer banking, said that it is the lowest it has been in more than 40 years.

“This will save owner-occupier customers making principal and interest repayments on a $400,000 home loan about $62 per month or $744 per year, which will provide more money in household budgets for other expenses at a time when cost of living remains challenging,” Mr Baird said.

“We strongly believe reducing rates is the right thing to do by our customers and reflects our focus on earning trust in the community and rewarding our loyal existing customers.”

Likewise, the Commonwealth Bank of Australia (CBA) revealed that it would pass the full 25bps cut to its mortgage holders, with the changes applying to its owner-occupied and investor variable home loans from 25 June.

This will mean that their owner-occupied (OO) principal and interest (P&I) standard variable rate will start from 5.12 per cent, OO interest-only (IO) standard variable rates will start from 5.67 per cent, investor P&I rates will start from 5.70 per cent and investor IO standard variable rates will start from 6.14 per cent.

According to CBA, by reducing the standard variable home loan rate by 0.25 per cent, the minimum required monthly repayment amount will be reduced by $62 a month, based on a mortgage of $400,000 for owner-occupiers paying principal and interest.

“We have carefully considered the RBA rate decision and the current funding environment, together with how we continue to meet our regulatory commitments, capital requirements and community expectations,” Angus Sullivan, CBA’s group executive, retail banking services, said.

ANZ and Westpac chart their own course

However, not all major banks have passed on the full rate.

ANZ revealed that it was only partially passing the rate reduction on to customers, decreasing its SVRs by 18bps across all its mortgage products from 14 June.

This will mean that OO P&I SVR will start from 5.18 per cent, while the OO IO SVR will reduce to 5.73 per cent.

For investors, the P&I SVR will fall to 5.78 per cent, while the investor IO SVR will fall to 6.24 per cent.

Speaking of the decision, ANZ group executive, Australia retail & commercial, Mark Hand, said: “In making this decision, we have weighed up a number of factors, such as business performance, market conditions and the impact on our customers, including our 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,” he said.

He added the home loan customers “looking for certainty” can look to lock into fixed rate home loans.

Likewise, Westpac announced that it would be reducing OO loans by 20 basis points from Tuesday 18 June, but will give a larger reduction to investor customers with interest-only repayments. 

From Tuesday 18 June, OO P&I SVRs will reduce by 20 basis points to 5.18 per cent, while OOs with IO repayments will see their rate reduce by the same amount to 5.77 per cent.

While residential property loans with P&I repayments will be reduced by 0.20 per cent p.a. to 5.73 per cent on 18 June, investors with IO repayments will see their rates reduce by a 35 basis points.

This will bring the investor IO SVR down to 6.09 per cent.

In addition, Westpac has introduced a new first home buyer special for owner occupier principal and interest customers with a fixed rate of 3.49 per cent p.a. for five years.

It has also said that customers who package their home loan with the Premier Advantage package will receive an additional discount on their home loan rate.

David Lindberg, Westpac's chief executive, consumer, said that the bank had taken "many factors into account" in making this decision, including balancing the interests of all stakeholders.

“We are operating in a historically low interest rate environment, which creates the opportunity for home-owners to get ahead on their repayments. It is also a good time for first home buyers to get onto the property ladder with some of the lowest rates in the history of the Australian mortgage market available," he said.

“At the same time, we understand there are some people doing it tough despite low interest rates, as growth in both wages and our economy remains low."

He said that any customers "doing it tough" can seek help through thee Westpac Assist service.

How the lenders are making their decisions

The decision around whether or not to pass on the full cash rate is a careful one lenders need to make, balancing customer expectations with shareholder returns and wholesale funding costs.

Indeed, NAB’s Mike Baird said that the circumstances of each RBA cash rate decision will always vary and while this has some influence on the cost of borrowing money, it is not the only funding cost driver for NAB.

“Funding costs have decreased in recent months reflecting improvements in domestic and offshore wholesale funding market conditions,” Mr Baird said.

“At the same time, the difference between what we charge and how much it costs us to fund a mortgage remains under pressure, given intense competition and increasing deposit costs.

“Decisions like this are never easy and we need to consider customer, shareholder and community expectations as well as the current economic environment to strike the right balance,” he said.

Mr Baird said NAB will continue to monitor the competitive environment to ensure its products and services represent value for both new and existing customers.

[Related: RBA makes cash rate move]