Australia’s central bank may deliver the first of two predicted interest rate cuts this week, putting banks under pressure to pass on the full reductions to their home loan customers.
The Reserve Bank of Australia’s decision on whether to cut the official interest rate to a record low 1.25 per cent this week is expected to be a very close call.
But economists predict there will be a 25 basis point rate cut in coming months, followed by another reduction later in the year to 1.0 per cent.
Market watchers say the banks will have little excuse not to pass on any RBA cuts to their customers in full.
“Right now there’s very little case for the banks to hold back part of a rate cut,” RateCity research director Sally Tindall told AAP.
“The cost of funding has declined significantly over recent months, relieving a lot of the profit pressures on the banks.
“Nevertheless, the banks aren’t required to dance to the beat of the RBA drum and after a tough year in what is a tough market, some banks may still choose not to pass it on in full.”
Ms Tindall said the banks should be winding back some of the out-of-cycle rate hikes they implemented for existing mortgage customers last year, although that may not happen.
The last time the RBA cut the cash rate in August 2016, the big four banks all opted for slimmer mortgage rate cuts – of between 0.10 and 0.14 percentage points – but increased some term deposit rates at the same time.
NAB, CBA and Westpac all passed the RBA’s 25 basis point cut in May 2016 on in full, although ANZ opted for a 19 basis point reduction.
Economists are divided on whether the RBA will cut on Tuesday, on the back of weak inflation figures, or wait.
A quarter of the 40 experts and economists surveyed by comparison site Finder expect a cut this month, but many tipped June and August.
Finder’s insights manager Graham Cooke said irrespective of the May decision, the majority of expects expect at least one cut by August and many predict another reduction will follow.
“We could easily see two cuts by the end of the year, which means a 1.0 per cent cash rate,” he told AAP.
Ms Tindall said the next rate cut could drop the lowest variable mortgage rate to 3.19 per cent, one of the lowest ever levels.
Even if there is a rate cut, Mr Cooke and Ms Tindall both say the best advice is for home owners to continue making their current level of repayments if they can.
Ms Tindall calculated the average mortgage holder – with a $400,000 home loan over 30 years – could save about $58 a month if they received a 25 basis point rate cut to 4.06 per cent.
She said if they kept their mortgage repayments the same, they would save about $18, 523 over the life of their loan and pay it off one year and seven months earlier.