Smart money is on RBA rate cut, but expert says banks won’t pass through cut in full

The Reserve Bank is expected to deliver its third consecutive rate cut today, but there are concerns that mortgage holders and business borrowers are unlikely to see the full cut passed through. 

Expectations the central bank would cut rates by 25 basis points to 4% were heightened yesterday by weak retail figures.

A report by banking analyst Jonathan Mott says if funding markets remain weak, the banks were likely to pass on only 10 or 15 basis points of the expected rate cut to mortgage holders.

The UBS report claims the banks are currently losing money on new mortgages and unless the banks reprice mortgages or funding markets improve significantly, there is no direct economic incentive for the banks to continue to write new housing loans.

“We see this as a dangerous situation for both the banks and the broader Australian economy,” Mott says.

An analysis of rate cuts in late 2011 by financial comparison site Mozo found that business lenders waited longer than mortgage holders for rate cuts to flow through.

Peter Strong, executive director of the Council of Small Business of Australia, says the banks’ recent job cuts and commentary on the European debt crisis is dampening expectations that future rate cuts will be passed through.

“It does highlight the issue that our banks are being affected by international monetary policy. We need to sit down with the banks and the Government to ensure that everybody benefits from cuts, not just big business,” he says.

Steven Münchenberg, chief executive of the Australian Bankers’ Association, says the funding costs identified by the UBS report are real and have been in play for the past six months.

Münchenberg says the if funding costs remain high and banks aren’t able to pass them on, the banks’ “natural response” will be to raise less money and start rationing what they have.

The report warnings from ratings agency Moody’s that Australia’s reliance on external funding – at 19% – was the highest in Asia-Pacific.