Will the banks cut rates if the RBA does?

People walk past the Reserve Bank of Australia building in Sydney on May 7, 2019. Source: Getty

The Reserve Bank of Australia sets the target cash rate 11 times a year, and next Tuesday it will decide whether rates should increase, stay the same, or decrease.

And, a rate cut is almost definite, with potential for more cuts to follow very quickly.

• Related article: JP Morgan just SHOCKED the market with its RBA rate cut call

• Related article: RBA keeps rates on HOLD ahead of federal election next week

• Related article: Why interest rates could fall to 0.5% or lower

Finder.com.au’s insights manager, Graham Cooke, said Westpac has gone so far as to predict three cuts this year, so the cash rate could tumble dramatically.

“This will lead to significant savings for borrowers, and be great news for potential first-timers with a deposit saved,” Cooke said.

“These low rates combined with the potential loosening of lending criteria and a 5 per cent deposit First Home Buyer’s Scheme could slow house price decline later this year,” he added.

But, Cooke said should the RBA cut by 25 basis points, banks might not necessarily pass on the whole cut, with only three of the four big banks doing so last time around, in August 2016.

This is how the banks responded after the 2 August 2016 cut

How the big four banks cut rates following the Reserve Bank of Australia's last cut on 2 August, 2016. Source: RateCity

How often do they ACTUALLY pass it on?

Cooke said a recent Finder analysis of the market showed the average variable home loan rate has only followed the cash rate with 92 per cent accuracy since 1990.

“Compare this to the average online savings account rate, which has followed the cash rate with 99 per cent accuracy (though there have been some significant drops recently).”

In other words, banks are actually quicker to take the interest off your savings than they are to take it off your home loan.

The moral of the story?

“Don’t pay the lazy tax,” Cooke said.

If you don’t get the full rate cut, it could be time to start looking at other options.

Cooke said the best value rates right now are under 4 per cent, so if your bank isn’t providing you with those rates, talk with your feet.

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