The cash rate is currently sitting at an all-time low of 1.25%, after the nation’s central bank lowered the official interest rate at the start of the month for the first time in almost three years.
Financial markets are now forecasting multiple cuts this year, and have priced in an 81% chance the bank will lower the cash rate to 1% at its July board meeting on Tuesday.
Commonwealth Bank and National Australia Bank were the only two out of the big four to pass on the RBA’s full 0.25 percentage point cut to home loan customers earlier this month, while Westpac and ANZ made partial cuts to their variable home loan rates of 0.20 and 0.18 percentage points, respectively.
Property data firm CoreLogic’s senior research analyst, Cameron Kusher says there’s a strong chance most lenders will not fully pass on any further cuts to the cash rate to home loan borrowers.
His reasoning? Because banks face a real funding threat.
About two thirds of the major banks’ funding for mortgages comes from domestic deposits, that is savers tucking their money away in savings accounts and term deposits.
But Mr Kusher says the lower cash rate has hit savers, whose interest earned on deposits have fallen sharply, and “it could be argued there is currently little benefit in saving”.
“Very low interest rates discourage saving and over time could lead to a drop in domestic deposits and an increase in the requirement for lenders to increase their reliance on other sources of funding (such as offshore),” he said.
Offshore funding is less predictable and can be more expensive than domestic deposits.
Mr Kusher said this means “very low mortgage rates” have the potential to hurt banks’ profits.
“This increases the likelihood that future cuts to the cash rate may not be passed on in full and likely explains why the reduction to deposit rates have to date been larger than the cuts to mortgage interest rates.”
He said an owner-occupier with a principal and interest mortgage has, on average, seen their mortgage interest rate fall by 2.18 percentage points between October 2011 and May 2019, while the cash rate has dropped from 4.75% to 1.25% since the cutting cycle began in November 2011.
Meanwhile, the drop in savings and term deposit rates in that time has been much greater.
According to CoreLogic analysis, rates for banks bonus savings accounts with at least $10,000 have fallen 3.30 percentage points on average to 2.15%, while online savings accounts with the same amount have fallen 4.0 percentage points to 0.85%, on average.
As for term deposits containing $10,000, rates for three months have fallen 3.20 percentage points to 1.85%, on average, and rates for three years have fallen 3.30 percentage points to an average of 2.3%.
RBA governor Philip Lowe has made it clear that there will be more cash rate cuts to come as the central bank wants to support jobs growth and stimulate a sluggish economy.