CBA Declines To Pass On Full Extent Of Rate Cut, Others Likely To Follow Suit

Post by Sharat on April 8, 2009 · Under Australian Economy, banking, home loans, interest rates, loans, mortgages · Comment

Australian banking major and the nation’s largest mortgage lender, CBA has declined to pass on the full extent of Tuesday’s cut in official interest rates to its mortgage borrowers. Whilst the Reserve Bank of Australia (RBA) cut official interest rates by 25 basis points, CBA responded by cutting standard variable home loan rates by 10 basis points, less than half the cut in interest rates made by the central bank.

The Reserve Bank of Australia cut its benchmark cash rate by 25 basis points to 3 percent, its lowest level since March 1960. The bank has so far slashed 425 basis points from the cash rate since September in a bid to stop the country from slipping into its first recession in nearly two decades

The Federal Government had an informal unwritten agreement with the big four banks which meant that they would pass full cuts in official interest rates to their customers. At the start of the weak, Westpac chief Gail Kelly signalled that the agreement was no longer tenable as funding costs both in the wholesale markets were the highest they had ever been, and deposit rates were also relatively high as Australian banks compete for deposits.

CBA said its reasons were very similar blaming the high cost of funding to support its on-going lending activities. CBA also said that is deposit rates were extremely high and has attracted a large amount of customers who have sought the relative safety of the bank in light of the banking crisis.

One of the advantages deposit funding has for the banks is a strong and stable source of funds which is not as prone to seizing up as wholesale international credit markets. However lenders are now making the schizophrenic case that the advantage is not so great in light of the high interest rates they must pay for depositors as they compete for customer’s cash.

”The cost of wholesale funding remains extremely high and as old funding matures and is replaced at much higher rates our average cost of funding continues to rise. Intense price competition on term deposits is also lifting the cost of retail deposit funding versus the official cash rate. We understand the importance of ensuring that in the current economic climate we support our home loan customers and pass on as much as we can with interest rate cuts.” Ross McEwan, the head of the Commonwealth’s retail banking division, said

CBA’s move is likely to be followed by the other three major banks, ANZ, Westpac and the National Australia Bank.

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