On Monday (14 October 2019), the Treasurer Mr Josh Frydenberg asked the Australian Competition and Consumer Commission (ACCC) to investigate the banks for not passing the full interest cut. This is in light of the most recent RBA 25 basis point rate cut to reduce the cash rate from 1% to 0.75%.
Josh Frydenberg said:
we need all the information at hand about the cost of funds of the banks, about the difference between what they charge existing customers and new customers, and in terms of why they are not passing on these rate cuts in full
Josh Frydenberg has asked the ACCC to look into the pricing of residential mortgages products and any obstacles customers face in switching banks. The inquiry will focus on the major banks. The specifics of the inquiry are as follows:
- Investigating the prices charged for residential mortgages across the entire market, including by major banks, smaller banks, and non-bank lenders,
- Considering how banks make pricing decisions, including passing on movements in the official cash rate,
- Examining differences in the prices paid by new and existing customers,
- Examining differences between the reference interest rates published by suppliers and the interest rates paid by customers, and
- Investigating barriers that may prevent consumers from switching lenders.
Why are the banks not passing the full rate cut?
An important consideration is how the lower interest rate environment is influencing banks’ net interest margin. Over the last few years, movements in interest rates and the net interest margin have been slightly correlated. From 2011, as the cash rate has fallen, so has the net interest margin (see figure 1 and 2). The banks’ capacity to reduce lending rates further without causing the net interest margin to fall is now constrained by the fact there is very little scope for the banks to reduce deposit rates.
Figure 1 – Major Bank’s Net Interest Margin
Figure 2 – Cash Rate
In regards to the most recent rate cut, the major banks announced that they would lower their variable housing rate by between 13 and 15 basis points. That is, none of the major banks passed on the reduction in the cash rate in full, possibly reflecting a preference to limit the negative impact on the net interest margin and profitability as well as to remain competitive in attracting funds from depositors.
The Treasurer said that the ACCC will deliver a preliminary report by 30 March 2020 and a final report by 30 September 2020. Investors could closely monitor this situation and any proposed measures to increase bank regulation, as increases in bank regulation could affect profitability and cash flow.
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