Big banks may not pass on cut for weeks
The Reserve Bank of Australia has again slashed interest rates and taken other steps to try to alleviate COVID-19 economic pressures, but it could take weeks before banks pass on the cut to customers.
Confirming predictions of a Melbourne Cup Day cut, the RBA shaved 15 basis points from the official cash rate, which now stands at 0.1 per cent - the lowest on record.
The RBA said the interest rate carving and its decision to implement further unconventional monetary policies were to alleviate economic pressures fuelled by the COVID-19 pandemic.
RateCity research director Sally Tindall said it could take weeks before banks decide to pass on the cut to consumers.
"The RBA governor wants this rate cut to help reduce 'problem loans' but this will only work if the banks pass it on," Ms Tindall said.
"There is immense pressure on the banks to do the right thing and pass this rate cut on in full, particularly as many lenders failed to pass on the last RBA cut to their variable customers."
After the RBA cut rates by 25 basis points on March 3, the big four banks passed it on full, with the ANZ and National Australia Bank cuts kicking in 10 days later while Westpac followed on March 17 and Commonwealth Bank on March 24.
By that stage, the RBA had swung into emergency mode, again cutting rates by 25 basis points on March 19.
But ANZ was the only one of the big four that reduced variable rates on that occasion, by 15 basis points and 8 days after the central bank's move.
Within about an hour of Tuesday's announcement, five smaller lenders had trimmed their variable home loan interest rates.
Athena, homeloans.com.au and Homestar Finance cut their by 0.15 per cent, Pacific Mortgage Group by between 0.1 and 0.16 per cent and Reduce Home Loans by between 0.1 and 0.2 per cent.
Canstar editor-at-large Effie Zahos said the major banks would likely have no choice but to follow through with home loan rate cuts - eventually.
"We should expect these to come through sooner rather than later," Ms Zahos told NCA NewsWire.
"The big banks have been working hard to clean up their image and they won't want to undo the goodwill they've established with customers during the pandemic by not pulling through with home loan rate cuts now."
If the average variable rate on a $400,000 loan amount (3.37 per cent) were to come down by 0.15 per cent, monthly repayments would drop by $33 or $396 annually, Canstar said.
Aside from reducing rates, the RBA said it would introduce additional quantitative easing measures, buying $100 billion worth of government bonds with maturities of around five to ten years - a program Axi chief global market strategist Stephen Innes said was a surprise.
The purchases will take place over the next six months.
"The board decided on a package of further measures to support job creation and the recovery of the Australian economy from the pandemic," RBA governor Philip Lowe said in a statement.
Mr Lowe warned of a bumpy recovery, with the outlook highly dependent on success in containing the virus.
"The economic recovery is under way and positive GDP growth is now expected in the September quarter, despite the restrictions in Victoria," Mr Lowe said.
"It will, however, take some time to reach the pre-pandemic level of output."
In its statement, the RBA said it expects unemployment to peak just below 8 per cent while the inflation rate would be 1 per cent in 2021.
Mr Lowe noted subdued inflation was expected to result in lower wage growth over coming years.
As part of its suite of measures, the RBA will reduce its target for three-year bond purchases to 0.1 per cent.
Commonwealth Bank chief economist Stephen Halmarick believes interest rates have hit the lowest threshold, with the RBA likely to ramp up its arsenal of other monetary measures to support the economy.
"It is unlikely interest rates will go any lower because the bank has said it does not want to go into negative territory," Mr Halmarick said.
"But it would be wrong to assume the RBA has no more monetary policy ammunition because they can continue to ramp up the bond purchase program."
The central bank will also lower the interest rate on its term funding facility to 0.1 per cent, which is assisting in providing the banking industry with cheaper funding.
The interest rate on exchange settlement balances has been lowered to zero.
The global pandemic pushed Australia's economy into its first recession in 30 years, with the RBA introducing in March a bond buying regime and term funding facility to flood the money market with additional liquidity.
Economists were broadly expecting the central bank to cut the rate to 0.1 per cent.
ANZ expected the move and for the RBA to increase its unconventional monetary policies, including the introduction of "pure" quantitative easing measures that target bonds with longer term maturities.
Quantitative easing is a form of monetary policy implemented by central banks when cutting interest rates is no longer effective because the interest rate is either at or approaching zero.
The unconventional policy is designed to promote economic growth by increasing the supply of money within financial markets.
Originally published as Big banks may not pass on cut for weeks