Banks to cut rates this week?

RBA keeps official rate at 3%, but we could see a cut by one of the big four as early as this week

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published March 5, 2013 2:37 pm AEDT

Now that the Reserve Bank of Australia (RBA) has left the official cash rate at 3%, all eyes are on the big banks, to see if they will cut rates outside of the RBA's monthly cycle.

The ANZ Bank (ASX: ANZ) has moved to a monthly rate decision, independent of the RBA's decision and is due to announce interest rate changes, if any, this Friday. With the banks' costs of funding having fallen dramatically, it's possible we could see cuts to mortgage rates this week, particularly if the ANZ is feeling brave.

All four of the big banks, including ANZ, Commonwealth Bank (ASX: CBA), Westpac Banking Corporation (ASX: WBC) and National Australia Bank (ASX: NAB), have waded into global wholesale funding markets in recent times, taking advantage of a 50% fall in wholesale rates.

Two weeks ago, we saw an unprecedented three smaller lenders cut their variable mortgage rates out-of-cycle. That may put more pressure on the big four.

Financial comparison website, RateCity estimates that the banks have passed on around 1.3% of the 1.75% of cuts to the official cash rate since November 2011. Michelle Hutchison, spokesperson for RateCity says that lenders have room to move, after keeping an average of 0.42% of the RBA's 1.75% in cuts to the official cash rate, citing high wholesale funding costs as the reason for not passing on cuts in full.

However, banks answer to their shareholders rather than borrowers, so they may be reluctant to cut mortgage rates out-of-cycle. Strong competition for deposits means deposit rates are relatively high, and now form around 54% of the banks' funding needs, according to the RBA. That could also hold banks bank from cutting their mortgage rates.

Foolish takeaway

New competitors, such as Mark Bouris' Yellow Brick Road (ASX: YBR), are also pressuring the banks by offering aggressively discounted loans. The big four's estimated 90% share of the mortgage market could be under threat, unless they take action to cut rates. Home owners will be hoping the good news comes as early as this week.

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The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned.

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