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Interest rates: Banks unlikely to pass on full savings, but you can get a cut before RBA acts

NAB, CommBank, ANZ and Westpac have a history of not passing on the full interest rate drops.

Australians are desperate for an interest rate cut but the Reserve Bank (RBA) dropping the cash rate won’t automatically make your mortgage cheaper because the Big Four banks don’t have to follow suit. There were no surprises when the central bank held the cash rate at 4.35 per cent on Tuesday in its first announcement of the year.

However, interest rate cuts, which likely won’t come until the second half of the year, remain on the minds of under-pressure borrowers around the country.

Macquarie Bank - Australia’s fifth-largest lender - has already reduced its basic variable home loan rates by up to 0.21 percentage points, but the Big Four have a history of not passing on full cuts and borrowers shouldn’t make any assumptions they will this time.

“The home loan market is really competitive but I doubt the banks will pass on the full amount of cuts,” Money expert David Koch told Yahoo Finance.

Interest rate cuts may not be on the cards for borrowers, even if the Reserve Bank decides to act.
Interest rate cuts may not be on the cards for borrowers, even if the Reserve Bank decides to act. (Yahoo Finance Australia)

This competition does, however, open you up to the possibility of getting a rate cut before the RBA acts.

"There are still so many people out there who have no idea what home loan rate they are paying," Koch said. “Check what rate you are paying and, if it's got a 7 in front of it, you're an absolute mug.”

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With "reasonable equity", the Compare the Market economic director said borrowers should be able to get an interest rate between 5.95 and 6.1 per cent.

Resolve Finance managing director Don Crellin agreed, telling Yahoo Finance banks would need to work harder to keep their clients, and their cash.

“Rates will be the battleground for new customers,” Crellin told Yahoo Finance. “Banks will continue to focus on market share, so expect the banks to get very competitive. Whether it's fixed or variable, changes are on the horizon as lenders jockey for position."

‘History has shown the banks don’t always pass on the cuts in full’

Koch isn’t the only one wary that the banks won’t give customers a complete rate break as soon as the cash rate is cut.

Fidelity International analyst and portfolio manager Zara Lyons told The Australian it “is a real possibility” a 0.25 per cent drop would only equate to a 0.15 per cent drop for borrowers, given they also increased the amount of interest they had been paying in savings accounts and term deposits.

“It’ll be a game of chicken on who is the first bank who wants to upset everyone by being out of cycle in terms of not passing on rate cuts,” Lyons said.

RateCity research director Sally Tindall agreed.

“Especially if there are a series of rapid cuts,” she told Yahoo Finance. “Your bank does not have to move with the cash rate, and history has shown that they don’t always pass on the cuts in full.”

RateCity’s analysis found none of the major banks passed on all of the RBA’s cash rate cuts in full in 2019 and 2020. Check out the full analysis here, along with how much extra you will have to continue paying if they don't.

What should I look out for in today’s RBA announcement?

Annual inflation in the three months to December came in at 4.1 per cent, lower than the RBA’s forecast of 4.5 per cent and a drop from the previous quarter’s 5.4 per cent. The central bank’s inflation target zone is 2-3 per cent.

Koch said the RBA had a tightening bias because inflation remained high, but that there would be clues about what the RBA board had been discussing over the past two days when governor Michele Bullock spoke after this afternoon’s decision dropped.

“If there's a shift in that rhetoric to neutral, saying ‘these are the right level of rates for the time’, that's a really significant softening in their language, which means that they're wary of the economy slowing down too much. They want a soft landing, not a hard landing,” Koch said.

A hard landing could mean Australians pull back too much in their spending and, when that happens, business can collapse.

When will interest rates go down?

Economists at the Big Four banks have all made different calls on when rates will be cut but they are in agreement that the central bank will hold the cash rate on Tuesday.

Big Four banks’ predictions:

  • CBA: Three cuts in 2024 with the first in September

  • Westpac: Two cuts in 2024 with the first in September

  • NAB: One cut in 2024 with the first in November

  • ANZ: One cut in 2024 in the fourth quarter

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