Date: May 05 2012
AUSTRALIA'S big banks have increased their margins on average home loans by as much as 1.45 percentage points during the past four years as they have posted record profits and now hold back cuts in official interest rates.
As banks last night jostled for position on new mortgage-rate settings, the Westpac-backed Bank of Melbourne moved to tackle National Australia Bank's claim to the lowest standard variable rate.
While it held back some of the Reserve Bank's official rate cut, the Bank of Melbourne cut its variable rate by 41 basis point to 6.99 per cent, putting pressure on NAB.
The Commonwealth Bank is also breathing down NAB's neck on mortgage pricing after this week pushing through a 40-basis-point cut to 7.01 per cent.
This week's jockeying on rates means banks have passed on fewer than half of the 2.5 percentage points of official rate cuts since the start of the global financial crisis.
Under pressure to fund lending from deposits, the banks argue the higher cost of raising funds is forcing them to hold back some of the reduction in interest rates.
The banks also say the continuing financial crisis has made the cost of borrowing funds on wholesale markets skyrocket.
Since the start of 2008, the big banks have, on average, held on to 1.45 percentage points of these cuts on their mortgage rate pricing. This has been in the form of pushing through out-of-cycle rate rises and failing to pass on Reserve Bank cuts in full.
Westpac yesterday became the third of the big four banks to announce mortgage rate cuts after the Reserve Bank surprised households by slashing 50 basis point from the cash rate on
Westpac, which owns the Bank of Melbourne, cut its standard variable home loan rate by 37 basis points to 7.09 per cent, deciding not to pass on all of the RBA's half-percentage-point cut. It did, however, cut its variable rate on business loans by 50 basis points.
Westpac's group executive of retail banking, Jason Yetton, said competition for deposits was pushing up funding costs.
''Balancing interest-rate decisions is certainly never easy and we've got to consider stakeholder needs around that,'' Mr Yetton said.
''It is now widely acknowledged that the link between the RBA's cash rate and the actual cost of money to banks - in effect, our own borrowing costs - plays an increasingly small role,'' he said.
''In particular, the price of deposits including term deposits has a major impact on our decision-making.''
Customers of the ANZ have to wait until Friday to learn where the cost on its standard variable rate mortgage is headed, in keeping with ANZ's controversial independent pricing strategy.
ANZ chief executive Mike Smith this week insisted that pressure was still coming through on the cost of raisings deposits.
''Quite clearly, with the situation in global credit markets remaining pretty uncertain and very volatile at best, all banks are going to be looking at deposits,'' Mr Smith said during an investor briefing.
''What we have to do is to manage that margin, and we've got to take some tough decisions around that,'' he said.
The RBA cut official rates to 3.75 per cent from 4.25 per cent this week after the economy showed continued weakness and its preferred inflation gauge sank to its lowest since 2000.
The suspense around the big four's mortgage rate pricing has been blamed for adding to the uncertainty of consumers, who in turn have curtailed spending and borrowing.
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