2019-10-22 09:36:251970-01-01 00:00:00

Big Banks Defy Treasurer Frydenberg

The Reserve Bank of Australia (RBA) has reduced the cash rate to a historical low of 1.25% – 25 basis points lower than the previous rate. Prior to the announcement, Treasurer Josh Frydenberg had strongly signalled the banks to pass on the rate cut fully to variable mortgage rates.

“I expect all banks to pass on the benefits of sustained reductions in funding costs,” Treasurer Frydenberg said. During Governor Lowe’s speech for the rate cut, he stated that the “reduction in the cash rate should be fully passed through to variable mortgage rates.”

However, while ANZ was the first of the big banks to update its loan rates, they did not reduce their variable home loan rates by the full 0.25%. Similarly, Westpac followed behind by passing only 0.2% for owner occupier customers, but reduced 0.35% for investor customers. The rest of the big four banks, CBA and NAB, agreed to transfer the full benefit of the rate cut to its customers.

In response to ANZ’s decision, Treasurer Frydenberg was “very disappointed” and that “the ANZ has let down its customers.” For Westpac, the Treasurer acknowledged “Westpac’s decision to spread the benefit of the rate cut among its different customers, ultimately it is up to Westpac itself to explain to its owner-occupier customers why they didn’t get the full benefit.”

Governor Lowe’s rationale for the rate cut

During Governor Lowe’s speech for the rate cut, he ‘broke’ his usual practice by providing a clear answer, which had always been, “it all depends”. His rationale behind the decision was the “recent reductions in banking funding costs”, which is a result of the change in monetary policy.

While the Governor acknowledged that the “savers”, predominantly the older Australians, would be “disappointed with the outcome of today’s meeting”, he believed that the rate cut would be the best for the overall economy.

The RBA believed the benefit to the Australian economy derives largely from two streams; lower Australian dollar and higher disposable income. They expected these changes would “lead to more jobs, lower unemployment and a stronger economy”, even though there will be people who “are felt unevenly across the community” in the short-term.

Banks’ response to the historically low rate

Following the RBA’s decision for a rate cut, ANZ Group Executive Mark Hand said the 0.18% reduction in all variable interest rates was announced from “a number of factors, such as business performance, market conditions and the impact on our customers, including our depositors.” He highlighted the need to “balance the increased cost of managing our business with our desire to provide customers with competitive lending and deposit rates.”

ANZ CEO Shayne Elliot defended their decision to pass only part of the rate cut and rejected the accusation of putting profits before people. Considering that there are “more depositors at ANZ than there are borrowers,” Mr Elliot emphasized the importance of balancing the interests of all stakeholders, including retirees and pensioners. He stood by his decision and believed it was the “best” they could do.

In ANZ’s statement, all variable interest rates for Australian home and residential investment loans were reduced by 0.18%. Standard variable rate for owner occupiers paying principal and interest fell to 5.18% per annum, from 5.36%. For owner-occupiers paying interest only, the index rate was reduced to 5.73% per year, from 5.91%. The new rates will become effective from 14 June.

Following ANZ’s announcement, CBA was the second bank to reduce its interest rate on home loans by 0.25% per annum. Group Executive Angus Sullivan said the bank had “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.” The reduction on the standard variable home loan rate would reduce monthly repayment amount by $62 a month, based on a $400,000 mortgage.

NAB believed “reducing rates is the right thing to do” and followed the RBA’s decision to cut interest rates by 0.25%. Chief Customer Officer Mike Baird said the decision will put the bank’s standard variable rate at the lowest for more than 40 years. From 14 June, the updated mortgage variable rates will become effective.

Westpac was the last bank to reduce its mortgage interest rate. It was also the first bank to introduce a range of rate cuts for home loan customers. This included a 0.2% cut for owner occupier customers and 0.35% cut for investor customers with interest-only payments. In a period where official interest rate has been historically low, Westpac Chief Executive David Lindberg said the bank’s decision will create “opportunity for home-owners to get ahead on their repayments.”

Further rate cut possible

The bank’s defiance against the politicians had created pressure on the financial institutions. This pressure would increase as the federal bank foreshadowed at further rate cuts this year if economic conditions do not improve. The banks’ decision will directly affect their customers. Therefore, it is important to consider all the options to minimize conflict of interest among its stakeholders.

By Jack Lee

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