Banks cut rates by more than they say

Banks cut rates by more than they say

First the good news for the mortgage-burdened: our major banks have cut interest rates by more than they publicly admit. In fact, they've cut by more than the Reserve Bank's last cash rate reduction and there's enough in the RBA's latest monetary policy statement to suggest there's another cash rate trimming in the offing.

The bad news is that there's not much more trimming in the offing, with the usual caveat that Europe doesn't implode or the Tea Party migrates to China. As is the nature of bad news, that was immediately reported upon the release of the statement on Friday while the rest of the economic treasure trove remained unexplored.

The RBA has started to put a finger on the smoke-and-mirrors game the banks play with their standard variable mortgage rates.

The RBA has started to put a finger on the smoke-and-mirrors game the banks play with their standard variable mortgage rates.

Photo: AFP

For example, the RBA has started to put a finger on the smoke-and-mirrors game the banks play with their “official” mortgage rates – the standard variable loan rate that attracts all the headlines and political opprobrium. It's been my suspicion for some time that this standard rate matters less and less as an indicator of what banks are actually charging.

While the banks have been copping flak for not passing on more of the RBA cash rate reductions, they've actually been passing on more than the last 25-point official movement – an indication that there is indeed competition in the home loan market.

Tucked away on page 50 of the RBA's 72-page document is a chart on intermediaries' lending rates. It shows that the average of the banks' “standard variable rates” fell by 19 points to 6.64 per cent between the end of July and November 8, taking in October's 25-point cash rate cut.


But the chart also shows that the average “package rate” fell by 29 points in the same period to 5.85 per cent – by 4 points more than the RBA's move. Yep, it's a matter of following what the banks do, rather than what they say.

The RBA defines the package rate as “the major banks' discounted package rates on $250,000 full-doc loans” – so it's not for everyone but it should be for most and is a better indication of the extent of discounts the lenders are prepared to make off their headline rate in the current market.

(The same chart shows personal loans were only trimmed by 7 points to 12.91 per cent since July and are only down by 36 points over the past 13 months despite the cash rate being cut by 150 points. Loans to large businesses have been cut by 156 points since October 2011 to 5.46 per cent.)

On the same page as the chart is a graph showing that the average interest rate on outstanding housing loans remains a bit over 6 per cent. Part of the reason for that higher level will be the inclusion of loans that don't meet discount package standards – low-doc, for example.

But another part will be because of inertia among people with existing mortgages – borrowers who took out loans a year or more ago and who haven't kept an eye on the competition in the market. They will have read the headlines about their bank's indicator lending rate movement, but not known that their bank is actually giving new customers – and those who haggle – better rates.

Which I guess is why the banks are happy to wear the flak for their headline rates not passing on the latest cash-rate movement in full – they can look like good guys doing deals with new customers while making more out of existing customers who don't know how to negotiate with their bank and/or take their business elsewhere.

What's more, that average package rate of 5.85 per cent can itself by up for negotiation downwards for good customers with larger loans. Just don't expect your bank to tell you if you don't ask.

There are plenty of other nuggets in the RBA statement that have been overlooked. Among other things, it shows that since the current monetary easing cycle started in late 2011 as Europe hit the wall, only Brazil has cut policy rates by more than Australia.

The statement also devotes more attention to the role of state and federal government policy in slowing the economy. The RBA writes: “Together, the federal and state budget outlooks imply a significant fiscal consolidation over the coming two years. Recent falls in public sector employment suggest that consolidation is having some dampening effect on activity.”

While the federal government's midyear economic and fiscal outlook plays down the impact of its surplus pursuit by including state government deficits this year to come up with a contraction in public sector demand of just half a per cent of GDP, the RBA statement notes: “A range of public estimates suggests that the move from a federal budget deficit to surplus may subtract around ¾–1½ percentage points from growth in real GDP in 2012-13.”

While the states' deficits in total grow this financial year, softening the federal impact, they are scheduled to tighten considerably in the next financial year.

The statement's modelling, with its well-publicised forecasts of a pick-up in inflation (but still within the RBA's target band) and slower growth in 2013, is based on the assumption that the cash rate remains unchanged, while the market is predicting another 50 points of cuts.

The question forecasters working off the RBA document have to ask themselves is whether Martin Place views growth of 2.75 per cent over 2013 as satisfactory. That's no longer “close to trend” or “a little below trend”, it is simply “below trend”.

Those turning negative on the chances of another rate cut must be assuming the RBA wouldn't want its core measure of inflation to go beyond the 2.75 per cent predicted in the statement – and then they have to wonder about the inflationary impact of another trimming when capacity is not a problem.

And what also is missed is that the RBA, unlike the Treasury, isn't afraid of making and publishing assumptions about another factor with important impact on the economy: population growth.

The RBA assumptions include working-age population growth of 1.7 per cent – reflecting the recent increase in net overseas migration.

That population growth means there will be more than monetary policy working to contain inflation – there's room for another trimming yet.

Michael Pascoe is a BusinessDay contributing editor.

Michael Pascoe

Michael Pascoe is a BusinessDay contributing editor. He comments on companies, markets and the economy.

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