RBA Rate Cut: Banks Warned to Pass on Full Cash Rate Cut

RBA Rate Cut: Banks Warned to Pass on Full Cash Rate Cut

RBA Rate Cut

Banks Warned to Pass on Full Cash Rate Cut

If the RBA decided to cut rates to 1.25 percent from 1.5 percent, this will be the first loosening of monetary policy since August 2016. Treasurer Josh Frydenberg met the chief executives of the big four banks to discuss interest rates decisions as well as the housing market downturn and closer corporate regulatory supervision. The banks were told that the government expects them to pass on in full any cash rate cut from the RBA.

Mr Frydenberg talked with the Westpac Chairman, NAB CEO and both the Chairman and CEO of Commonwealth Bank and ANZ.

Mr Frydenberg stressed, “With the economy facing significant headwinds domestically and internationally, it is important that the banks are continuing to keep their lending book open and that they pass on in full to the public any benefits of reduced funding costs.”

The cut will likely put an end to the longest run of equal consecutive cash rates in Australian history. The director of fixed income at Franklin Templeton, Andrew Canobi, however, said he expected the banks to pass on a good portion of the cut but not all of it. This is because he suspects the bank’s effective yield curves are flattening and the banks’ own lending costs put them under pressure.

Currently, not one of the big four bank chief executives have declared that “if the Reserve Bank cuts rates on Tuesday, we will pass the cut on in full”.

Westpac CEO Brian Hartzer pointed out of the funding costs and margin pressure.  He said, “I understand the interest in this, and we certainly understand that interest rates are really important for customers, particularly those who have loans; they’re also important for depositors, and that’s all I can say right now”, which clearly implies that they are not going to pass on the rate differential.

Rate Cut yield trap

The last time the RBA cut rates was in 2016, which helped lift house prices across Sydney and Melbourne, an uptrend that didn’t slow till late 2017, with prices pitching downwards since. Figures from CoreLogic on Monday confirmed dwelling values in Sydney dropped 11.6 percent while in Melbourne they are 12.6 percent lower than what they were in May 2018. The property market has urged for further rate cuts.

The cut would help to stimulate the economy as annual growth may be the lowest since 2009 as foreshadowed by the Australian Bureau of Statistics(ABS).

However, former Reserve Bank board member Warwick McKibbin appraised the RBA board, which has done well to resist calls for historically low-interest rates and said the central bank should not cut the cash rate on Tuesday.

Professor McKibbin, now director of the Australian National University’s Centre for Applied Macroeconomic Analysis, said, “Leaving interest rates at already low levels and using the position of governor to push for other policy changes is the only responsible option that remains for the RBA.”

With headline inflation now at 1.3 percent, the cash rate of 1.25 percent means real interest rates are effectively negative in Australia. As a result, this will raise some fears among savers, who would be worse off.

Tax cut better than rates

Some stated that monetary policy has failed to boost growth throughout the developed world and RBA should hold the rate for use as a last resort, especially as the uncertainty of trade tensions still remain.

JP Morgan, CBA and Deloitte Access Economics all conclude that the federal government’s legislated tax cuts is equal to around 50 basis points in rate cuts, with the chief executive of Coca-Cola Amatil, Alison Watkins said, “The RBA will be alert to that there’s very limited firepower for further cuts if things continue to deteriorate”.

By Frank Zhang

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