Big Four Banks Unlikely to Fully Pass on RBA Rate Cuts: Implications for Borrowers and Private Lending
Even if Michele Bullock announces a rate cut on 18 February, it’s no guarantee banks will pass it on in full to customers.
Big Four Banks Unlikely to Fully Pass on RBA Rate Cuts: Implications for Borrowers and Private Lending
As the Reserve Bank of Australia (RBA) contemplates potential interest rate cuts in 2025, borrowers are hopeful for relief after a prolonged period of rate hikes. However, historical patterns suggest that Australia's major banks—the Commonwealth Bank of Australia (CBA), National Australia Bank (NAB), Australia and New Zealand Banking Group (ANZ), and Westpac—may not fully pass on these reductions to customers. This hesitancy underscores the importance of exploring alternative financing options, such as private lending, to secure more favourable terms.
Historical Context: Banks' Reluctance to Pass on Rate Cuts
Over the past decade, the RBA has implemented multiple cash rate reductions aimed at stimulating economic activity. Despite these efforts, the big four banks have often been reluctant to pass on the full extent of these cuts to borrowers. A Canstar analysis revealed that out of 10 rate cuts in the past 10 years, CBA, NAB, and ANZ each passed on only four in full, while Westpac did so only twice. In contrast, since 2022, there have been 13 RBA rate hikes, all of which were fully passed on to customers by these banks. This disparity highlights a tendency among major banks to be more responsive to rate increases than decreases.
Current Economic Climate and Anticipated Rate Cuts
In 2025, the economic landscape remains uncertain, with central banks worldwide grappling with varied monetary policy actions. Some G10 central banks have continued rate cuts initiated in the previous year, while others have taken different approaches. In Australia, the RBA is expected to cut interest rates to provide relief to borrowers. Economists predict that the RBA will lower the cash rate—currently at 4.35%—at its meeting on February 17-18, 2025. The big four banks have aligned their forecasts accordingly, with NAB being the only one to have already reduced mortgage interest rates ahead of the RBA's meeting.
Banks' Potential Responses to Upcoming Rate Cuts
While there is optimism that banks will pass on the initial rate cut in full, experts caution that subsequent cuts may not be fully transmitted to borrowers. Sally Tindall, Canstar's data director, notes, "I can't see a world where they don't pass on the first cut in full. There would be serious backlash." However, she warns that if there are a series of cuts, banks may begin to hold back, emphasising the need for customers to remain vigilant. Mortgage Choice brokerage owner David Thurmond concurs, stating that failing to pass on the first cut in full would be "financial suicide" due to the negative optics. Both experts advise borrowers to monitor their lenders' actions closely and be prepared to take action if necessary.
Impact on Borrowers: The Importance of Vigilance
For borrowers, the potential reluctance of banks to pass on full rate cuts means that proactive management of their mortgages is essential. Ms. Tindall emphasizes the importance of engagement, suggesting that a rate cut will encourage borrowers to reassess their financial situations. She notes that competitive rates may become available, with new customers potentially offered rate discounts exceeding the actual cuts. This environment could lead to increased competition in the marketplace and incentivize people to switch lenders. Mr. Thurmond advises mortgage holders not to wait for better rates to be offered but to take action themselves, highlighting that the cost of switching banks is about $700, a factor to consider when evaluating the benefits of moving to a new lender.
Private Lending as an Alternative
Given the uncertainty surrounding traditional banks' responses to rate cuts, private lending emerges as a viable alternative for borrowers seeking more favourable terms. Private lenders often offer more flexible loan structures and can be more responsive to individual borrower needs compared to traditional banks. This flexibility can be particularly beneficial in a fluctuating interest rate environment, providing borrowers with options that may not be available through conventional lending channels.
Kalpi's Perspective: Anticipated Timing of Rate Cuts
Kalpi, a financial analyst, expresses skepticism about the immediacy of rate cuts, suggesting that a decrease may not occur until April or May 2025. This perspective is supported by evidence from the Melbourne Institute's Inflation Gauge, which indicates that while inflationary pressures are easing, it may be prudent for the RBA to adopt a wait-and-see approach before committing to cutting interest rates. Associate Professor Sam Tsiaplias from the Melbourne Institute advises caution, highlighting potential inflationary risks and suggesting that waiting a few months before implementing rate cuts could be a more measured approach.
Conclusion
As the RBA contemplates potential rate cuts in 2025, borrowers should remain vigilant and proactive in managing their mortgages. Historical tendencies of major banks suggest that not all rate cuts may be fully passed on to customers, underscoring the importance of exploring alternative financing options such as private lending. Staying informed and considering a range of lending sources can help borrowers secure the most favourable terms in an uncertain economic environment.
