CBA first to mover on rate cut

  • By Christine St Anne

Australia’s largest lender has moved on cutting rates following the Reserve Bank of Australia’s historic decision to lower the cash rate.

The decision was ahead of RBA governor Philip Lowe’s comments. Lowe said at a press conference that it was in the banks’ best interest to support people during the time of COVID-19.

The rate cuts have been targeted to small businesses. The Commonwealth Bank reduced small business loans by 100 basis points but there will be no change to the standard variable rate.

Term deposit rates have increased by 60 basis points to 1.70 per cent.

The bank has cut its 1-, 2- and 3-year fixed rates to as low as 2.29 per cent.

“This is an unprecedented move from our biggest bank, which will exasperate its mortgage customers,” RateCity research director Sally Tindall said.

However, Morningstar bank analyst Nathan Zaia does not expect the banks to pass on the full rate cut as they did in the previous round of rate cuts.

“While the RBA cash rate has come down, the recent shock to credit markets has seen spreads widen as well. The banks should partially be helped by discounting for new loans and probably not being as aggressive as they had been in the near term,” he said.

On Thursday, the RBA announced a four-pronged strategy to support the economy in times that the governor Philip Lowe described as “extraordinary.

This included a reduction in the cash rate to 0.25 per cent.

The central bank would also target the yield on 3-year Australian Government bonds of around 0.25 per cent, achieved through buying government bonds in the secondary market.

A $90 billion funding facility for the banking system was also announced, with particular support for credit to small and medium-sized businesses at a fixed rate of 0.25 per cent.

This follows the announcement of the government to provide $15 billion to small banks and credit unions to enable them to supply low-cost loans to consumers and small business.

Exchange settlement balances at the Reserve Bank will be remunerated at 10 basis points, rather than zero as would have been the case under the previous arrangements.

This will mitigate the cost to the banking system associated with the large increase in banks' settlement balances at the Reserve Bank that will occur following these policy actions.

Echoing views by the Treasurer Josh Frydenberg, Lowe said it was in the interest of the banks to support people during this period.

“If they don’t support people, the unemployment rate will be higher, the economy will be weaker and their credit losses will be larger.

“Because this is a temporary shock. We need to create a bridge [to a better time] and the banks have an important role to do that.”

Lowe added that the economy had “fantastic fundamentals” – education, rule of law and robust public institutions.

“Once this virus is contained and we get through, our fundamentals will still be there.”