UPDATE: The RBA has cut the official cash rate by 0.50 per cent at its meeting today.
It’s the first Tuesday of the month, and so one would normally be writing something like “all eyes are on the Reserve Bank…”. But with the banks (and ANZ in particular) at pains to distance their pricing decisions from the RBA, where should we really be focussing our gaze?
Well first up, regardless of what the banks do at the margins, the Reserve Bank still wields significant influence on retail interest rates. And there is no doubt, at least none in my mind, that the Reserve Bank will cut rates by 25 basis points this afternoon. It has been clear for some time that the non-mining economy is struggling. It is now also clear that the economy overall is not as strong as the RBA hoped. Inflation in particular, which is the main policy target of monetary policy, has come in at a level that allows the RBA some room to move. So move they shall.
I don’t expect to see 50 basis points, however, for two reasons:
- That inflation number that so much commentary has focussed on wasn’t really as soft as the headline rate suggests. There were some significant price falls this some areas (as consumers of bananas and TVs will tell you), offset by some strong rises in others (as consumers of schools and drugs will tell you). The RBA is clever enough to strip away all the noise and look at the real trends in prices, and when they do they will see an inflation rate that’s under control for now but certainly not soft.
- I don’t think that the RBA Board are likely to follow months of inaction and caution (for which they’ve attracted some very strident criticism) with a sudden shift. I think it is far more likely that they plan two consecutive cuts of 25 points – easy does it, take your time, gather a little more information.
So that’s the RBA, but as we know, the banks dance to their own tune now. So what might this actually mean for borrowers?
ANZ has a big influence on how things play out now. They have moved twice on their own, but only by 6 points each time. Theirs is clearly a strategy to make small, regular pricing changes on a timetable of their own choosing, and to ride out the backlash. They want to free up their pricing hand. If they succeed, home loan pricing may end up similar to petrol pricing: expensive, much discussed and much distrusted, but accepted as regularly changeable.
Most of the other banks have moved between 10 and 15 points in response to the ANZ first rise. So by making only a small second rise, ANZ have really only caught up to the others and we are actually at a point where the banks are looking for a new lead. So far, we’ve had some pretty clear warnings from several banks that they won’t pass everything on.
The easiest thing for a bank to do would be to wait for Friday next week and see what ANZ announces. (They may have to wait until very late on Friday, if last month is any guide.) I expect a large number of banks will do so. And I expect that we will be seeing cuts of the order of only 15 out of a possible 25 basis points, disappointing plenty of home borrowers. And plenty of business owners too, who are also unlikely to get much joy.
I would like to see some lenders make their own call instead of taking the easy option. I think the stage it set for bold bankers to pass on the full 25 point cut this week, to try to seize the initiative and attempt to seize a few extra customers. And to put the pressure on ANZ and those who wait to follow their lead next week. It is a tactic that could pay off in this climate, where slightly dented margins could be offset by increased brand equity and increased new business and increased retention. So come on challenger brands, come on mutuals, come on nab, how about it?
But perhaps there is another interest rate decision, often overlooked at RBA time, which deserves attention: what will banks do with deposit interest rates on savings accounts and term deposits? These are increasingly important to many, as investors remain wary of the markets and households continue to de-leverage. But they are also critical to borrowers, because the rate that banks pay on new deposits is actually the single biggest driver of the cost of funds behind variable loans.
And it is hard to tell quite how the banks will cut into deposit rates. Since November last year, while the RBA rate has fallen 50 basis points, the leading headline rates on high interest savings accounts have generally fallen by between 25 and 50 points. In Term Deposits the leading rates have fallen far less, with the best rates up for terms up to 1 year having fallen by only 30 points or less.
The pressure to keep rates up comes from the top of the rates table, which essentially means UBank. Their savings account rate followed the RBA down 50 points last year, but from a very high starting point. And their 6 month and 1 year term deposit rates are currently higher than they were just before the November RBA rate cut. Everyone else is struggling to keep up.
So while NAB takes the high moral ground in home loans by claiming the lowest standard variable rate of the Big 4, it is actually the aggressive deposit pricing of nab’s own subsidiary that is driving deposit rate competition and contributing in part to the increase in home loan funding costs across the industry.
So perhaps all eyes should really be on UBank, and their deposit rates. Depositors will be hoping for a small cut; borrowers should be hoping that they pass on the full cut.
Andrew Duncanson is the Research & Insights Director at Mozo.