Mortgages v official cash rates: How Australia's banks are taking a bigger share, in one chart

Open Home by Kate Carroll and Fabrication by Veronica Herber at the 2015 Sculptures by the Sea exhibition at Bondi. Lisa Maree Williams/Getty Images

The gap between what Australian banks charge home owners for their loans and the Reserve Bank’s official cash rate is widening.

In other words, the banks have got into the habit of not passing on in full any decreases when the RBA cuts official interest rates.

The margin — the difference in the cost to the banks of acquiring loan funds and what it charges a home owner for that money — is increasing.

The latest moves over the last week by the big four banks, all of which have increased their variable rates for home owners without any signal from the Reserve Bank, moves this gap out even further.

ANZ is increasing variable interest rates for owner occupier loans by 0.18 of a percentage point to 5.56%, the NAB by 0.17 to 5.60%, Westpac by 0.2 to 5.68% and the Commonwealth by 15 basis points to 5.60% .

The reason, banks argue, for increasing home loan rates is to recover the cost of keeping more capital as required under new rules designed to make the banks more resilient to any future financial crisis.

“This decision reflects the significant additional cost of capital banks are now required to hold against home lending,” said ANZ CEO Australia Mark Whelan.

The four biggest banks have already gone to the market this year for major capital raisings, hauling in around $18 billion in issues between them.

However, the major banks, far from just recouping costs by lifting home loan interest rates, will actually improve their profits by between 2% and 3%, according to analysis by Deutsche Bank.

This chart by Shane Oliver, chief economist at AMP Capital, shows the widening gap between official rates and mortgage rates:

“Clearly the gap between the two has been expanding since the GFC supposedly due to ‘rising bank funding costs’ as banks first had to rely more on bank deposits and now have to run higher capital ratios,” says Oliver.

“The widening gap applies whether standard or discount variable rates are used. Because it’s borrowing rates that ultimately count for the economy rather than the cash rate, the RBA has had to compensate by cutting the cash rate more than would normally be the case in both the 2008-09 easing cycle and since 2011.”

Oliver sees the RBA cutting official rates further from the current 2%, perhaps next month or as late as early next year.

“While the RBA looks like it doesn’t want to have to cut rates again, it won’t want to see households with a mortgage paying higher rates just now either given the risk this will pose to consumer spending at a time when economic growth is still weak,” he says.

“So we remain of the view the RBA should and ultimately will cut rates again to ensure that this does not happen.”

The RBA’s next board meeting and cash announcement is November 3rd at 2.30pm.

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