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A generous cut from the RBA: Mark Bouris

Businessman Mark Bouris offers his interpretation of the Reserve Bank's critical interest rate cut of 50 basis points.

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HOME and business borrowers are likely to get just two thirds of the 0.50 percentage point interest rate cut delivered by the Reserve Bank yesterday after the Bank of Queensland went out ahead of its rivals and delivered only 0.35 points.

The bank's decision to cut its variable rate to 7.11 per cent rather than 6.96 per cent will deny a customer with a $300,000 mortgage $28 a month.

Herald calculations suggest that if all the banks withheld as much of the cut as the Bank of Queensland they would hang on to an extra $1.2 billion a year.

The RateCity chief executive, Damian Smith, said none of the big banks was likely to show its hand until the ANZ announced its decision at its scheduled rates review on Friday week.

"They will allow ANZ to play its new role as unofficial price-setter," Mr Smith said. ''The signals from the big four suggest that they will try to hold on to part of this cut."

The Reserve made its decision taking into account what it knows about next week's federal budget, which will include deep cuts to government spending that are likely to slow the economy.

But futures traders were last night pricing in cuts totalling a further 0.50 points in the next three months.

The new practice adopted by the big four this year of reviewing and adjusting their rates independently of the Reserve is infuriating the bank.

The Herald has learnt that one of the reasons the Reserve went for a big cut of 0.50 points yesterday, rather than a more traditional 0.25 with the option of a follow-up, was a concern that each time one of the big four adjusted its rates separately from the Reserve, consumer and business confidence took a hit.

The RBA believes a ''drip feed'' of negative news about small adjustments (such as ANZ's two recent increases of 0.06 points) is negating the effect on confidence of its bigger cuts in the overall level of rates.

By cutting once by 0.50 points, taking the cash rate to 3.75 per cent, rather than twice by 0.25 the bank believes it can cut through the ''noise'' of multiple decisions by private banks.

The big four's new practice of not immediately responding to the Reserve left the Treasurer, Wayne Swan, unable to shame banks for not passing on cuts as he has done in the past.

During a break from budget preparations he told journalists that bank customers would be "very angry" if the cut was not passed on in full.

"Consumers will expect that, but the fact is that if they are unhappy with their financial institution, people can go down the road and get a better deal and indeed they have been doing so."

If fully passed on the 0.50 cut in the Reserve Bank cash rate will save a borrower with a $300,000 mortgage $96 a month. If only partly passed on as done by the Bank of Queensland it will save $68 a month.

Private bank analysts believe that withholding 0.10 or 0.15 points of the 0.50 cut would complete the process of restoring bank margins to where they were in mid 2011 before wholesale borrowing costs ballooned.

Announcing the Reserve Bank board's decision its governor, Glenn Stevens, hinted that he expected private banks to soon stop widening their margins, as their wholesale funding costs had "declined over recent months".

Contributing to the RBA's decision was a feeling that economic indicators have weakened. It believes the inflation figures released before Anzac Day show evidence of deep discounting by retailers desperate to move stock.

Data released this week showed new home sales in March were at their lowest level in a decade. Bureau of Statistics data showed capital city prices fell 1.1 per cent in the three months to March. And figures from RP Data showed house prices down 4.5 per cent on a year ago.

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