Lowe backs banks to pass on rates, flags further cut

  • By Christine St Anne

Reserve Bank governor Philip Lowe has urged banks to pass on the central bank’s interest rate cut to mortgage rates on the back of falling funding costs and flagged a further cut to the official cash rate.

Speaking at the RBA’s board dinner with the business community in Sydney on Tuesday, Lowe tackled the often-asked question on mortgage cuts and rate falls. 

When the central bank announced the rate cut on Tuesday of 25 basis points - after two and a half year's of keeping the rate steady at 1.5 per cent - the Commonwealth Bank said it would fully pass on the rate cut to its standard variable interest rates. 

ANZ also announced it would cut its variable home loans but did not pass the full cut – instead opting to give its customers an 0.18 per cent cut. 

“My usual practice in answering this question has been to explain that there are a range of other factors that influence mortgage pricing,” he sad and added that “there are often reasonable explanations for why the standard variable mortgage rate does not move in lock-step with the cash rate”.

“Today, though, I would like to break with my usual practice and provide a clearer answer. And that is: Yes, this reduction in the cash rate should be fully passed through to variable mortgage rates,” he said.

His answer is based on recent reductions in bank funding costs. 

“Not only have these costs declined as a result of the change in monetary policy, but they have also declined because of movements in market-based spreads,” he said.

“Last year, these spreads increased, and most lenders responded by increasing their standard variable rates by around 15 basis points. 

“Over recent months, these spreads have reversed all the increase that occurred last year and returned to their 2017 levels.”

According to Lowe, the result is that there has been a substantial reduction – at both the short end and the long end – in the cost of banks raising funds in wholesale markets. 

“Average rates on retail deposits have also come down. This means that the lower cash rate should be fully passed through into standard variable mortgage rates. 

“Full pass-through would also mean that the economy receives the full benefit of today’s policy decision.” 

Lowe also said that it was not "unreasonable to expect a lower cash rate".

"Our latest set of forecasts were prepared on the assumption that the cash rate would follow the path implied by market pricing, which was for the cash rate to be around 1 per cent by the end of the year."