Spotlight turns to banks after RBA slashes rates to 3.75%

The Reserve Bank has answered the prayers of the business sector, lowering the cash rate by 50 basis points to 3.75%, but experts aren’t convinced the big banks will pass on the rate cut in full.

At today’s meeting, RBA governor Glenn Stevens said the decision is based on information that suggests conditions have been “somewhat weaker than expected” while inflation has moderated.

It’s the biggest drop since the peak of the global financial crisis, and the lowest level since December 2009.

“In Australia, output growth was somewhat below trend over the past year, notwithstanding that growth in domestic demand ran at its fastest pace for four years,” Stevens said in a statement.

“Output growth was affected in part by temporary factors, but also by the persistently high exchange rate. Considerable structural change is also occurring in the economy.”

“Labour market conditions softened during 2011, though the rate of unemployment has so far remained little changed at a low level.”

Stevens said as a result of the two rate cuts late last year, interest rates for borrowers have been close to their medium-term averages over recent months.

However, he admitted rates are “tending to increase a little” as lenders pass on the higher costs of funding.

“Since it last changed the cash rate in December, the board has maintained the view that the setting of policy was appropriate for the time being, but that the inflation outlook would provide scope for easier monetary policy, if needed, to support demand,” Stevens said.

“The accretion of evidence over recent months suggests that it is now appropriate for a further step in that direction.”

“In considering the appropriate size of adjustment to the cash rate at today’s meeting, the board judged it desirable that financial conditions now be easier than those which had prevailed in December.”

“A reduction of 50 basis points in the cash rate was, in this instance, therefore judged to be necessary in order to deliver the appropriate level of borrowing rates.”

But financial comparison website RateCity isn’t convinced customers will receive a full interest rate reduction from the big banks.

RateCity chief executive Damian Smith says he expects the four major banks to attempt to hold back some of the rate reduction.

“This is a very big move from the Reserve Bank and it will help thousands of households, with people on a $300,000 mortgage potentially saving around $1,000 per year,” Smith says.

“But it’s unlikely that all lenders will pass on the full 50 basis point rate cut. The signals from the big four banks suggest that they will try to hold on to part of this rate cut.”

“Remember that of the 50 basis point cash rate reduction from the RBA since November, the big four banks have only passed on around 40 basis points to variable rate home loan customers.”

Peter Anderson, chief executive of the Australian Chamber of Commerce and Industry, has described the rate cut as a much-needed boost for small business.

“It is now more important than ever that every cent of this reduction is passed on in full in good time by the retail banks to their customers,” he said in a statement.

“It is vital that the Reserve Bank’s intention not be defeated by retail banks clawing a portion of this cut to themselves.”

Anderson dismissed claims the rate reduction shows the economy is in crisis.

“[It is] an economy where the slow lanes of growth still need support, where the cost of finance has been relatively high and where business and consumer confidence need to be strengthened,” he said.

“In light of this cut, the task for next Tuesday’s Federal Budget becomes clearer. That budget must move in sync and also reduce the cost of doing business, and boost confidence.”