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In line with the speculations of a rate cut in October meeting, the Reserve Bank of Australia (RBA) has slashed the interest rates by 25 basis points to a record low level of 0.75 per cent to boost weak economy. This is the third such reduction by the central bank in the last five months. Previously, the bank has reduced the interest rates by 0.25 percentage points each in June and July this year.
This is the first time that the Australian interest rates have dipped below one per cent. Shadow Treasurer Jim Chalmers and Treasurer Josh Frydenberg have urged the big four banks to pass on the complete 25 basis points cut to the borrowers.
The big four banks of Australia passed on about 80 per cent of the 0.5 percentage point of cuts in June and July 2019 but are likely to restrain themselves at this time.
Let us take a look at paths taken by the big four banks in response to RBA?s rate cut in June, July and October 2019:
Response to June Rate Cut
In June this year, the RBA lowered the cash rate by 25 basis points to 1.25 per cent to make further inroads into the spare capacity in the economy. The response of the big four banks to the June cash rate cut is as follows:
Commonwealth Bank of Australia
The Commonwealth Bank of Australia (ASX: CBA) lowered its standard variable home loan rate by 25 basis points, passing on the full rate cut. The bank cautiously considered the central bank?s rate move and the prevailing funding environment in making its decision.
Australia and New Zealand Banking Group
The Australia and New Zealand Banking Group (ASX: ANZ) was the first one to pass the part of June rate cut to borrowers. However, the bank did not pass the full 0.25 percentage points cut, it reduced the rates by 18 basis points. The bank was even slammed for not passing on the full rate cut to the borrowers.
National Australia Bank Limited
NAB or the National Australia Bank Limited too passed on the cut in full by lowering all its standard variable rate home loans by 25 basis points.
Westpac Banking Corporation
One of the big four banks, Westpac Banking Corporation (ASX: WBC) declined to pass the full rate cut and lowered its rate by 20 basis points. It was the last of the big four banks to pass on the rate cut.
Response to July Rate Cut
The RBA again reduced the interest rates by 25 basis points in July 2019, taking it to 1.00 per cent. The bank even signaled for further easing of monetary policy if essential to support sustainable economic growth.
The response of the big four banks to the July cash rate cut is as follows:
Commonwealth Bank of Australia
CBA also lowered the interest rates for homeowners, passing on 0.19 to 0.25 per cent rate cut to borrowers. The bank also made a conscious decision to restrict the interest rate cut on the most popular savings account.
Owner Occupier Principal and Interest Rate: Lowered by 19 basis points to 4.93 per cent p.a.
Owner Occupier Interest Rate Only: 25 points down to 5.42 per cent p.a.
Investor and Principal Interest Rate: 19 points down to 5.51 per cent p.a.
Investor Interest Rate Only: 0.25 per cent lowered to 5.89 per cent
Australia and New Zealand Banking Group
After being criticized for not passing the full cut, the bank lowered its variable interest rates for its home loan customers by 0.25 percentage point. The bank applied the reduction to all its variable rate home loans.
Owner Occupier Principal and Interest Rate: 5.18 per cent p.a. to 4.93 per cent p.a.
Owner Occupier Interest Rate Only: 5.73 per cent p.a. to 5.48 per cent p.a.
National Australia Bank Limited
NAB reduced the interest rates by 0.19 per cent per annum, taking its home loan variable rates to:
Owner Occupier Principal and Interest Rate: 4.92 per cent p.a.
Owner Occupier Interest Rate Only: 5.52 per cent p.a.
Investor and Principal Interest Rate: 5.49 per cent p.a.
Investor Interest Rate Only: 5.97 per cent p.a.
Westpac Banking Corporation
Westpac reduced 0.20 percentage point for owner occupied and 0.30 percentage point for investors with interest only payments. The rates on variable owner occupier principal and interest home loans, variable residential investment property loan principal and interest, variable owner occupier interest only home loans were each lowered by 20 basis points. However, variable residential investment property loan rate for interest only repayments was lowered by 30 basis points to 5.79 per cent per annum.
Response to October Rate Cut
CBA is the first bank among the big four banks, to pass on the cash rate cut of October to borrowers. The bank has announced that it will lower its rates on owner occupier principal and interest loans to 4.80 per cent per annum, 13 basis points down than the previous rates. The bank has also decided to pass on the full 0.25 percentage point rate cut to property investors with interest-only loans.
The other three major banks are yet to release update on the rate cuts.
Following the RBA?s rate cut announcement, the Australian dollar slipped by 0.4 per cent to 67.22 cents. The S&P/ASX 200 index closed higher at 6742.8, up by 0.8 per cent or 54.5 points.
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