The Reserve Bank of Australia (RBA) is poised to announce its next decision on interest rates this afternoon, but one analyst has warned the banks may play a “game of chicken” when it comes to interest rate cuts.
While the RBA is expected to keep the official cash rate on hold at 4.35 per cent later today, it’s widely tipped to start cutting the cash rate later this year, probably from August, according to economists.
But Fidelity International analyst and portfolio manager Zara Lyons told The Australian that the major banks may not pass on the upcoming rate cuts in full, but instead lower the interest rates they charge on home loans by less than the RBA cut.
“It is a real possibility that we could see that,” Ms Lyons said.
“It’ll be a game of chicken on who is the first bank who wants to upset everyone by being out of cycle in terms of not passing on rate cuts.”
She said that in the event that the RBA cuts the cash rate by 0.25 per cent, the banks may only reduce their mortgage interest rates by 0.15 per cent.
Ms Lyons said the reason the major banks may not pass on any future RBA cuts in full is due to a desire to protect their net interest margins – or the difference between the amount of money the bank earns in interest on loans and what it pays out in interest on deposits.
As the RBA increased the cash rate over the past 18 months, the banks passed on the rises to mortgage customers.
But they also increased the amount of interest they are paying on deposits – such as money in savings accounts and term deposits – competing aggressively to attract funds from cashed-up Aussies, particularly Baby Boomers.
This has seen the average net interest margin of the major banks fall below two per cent, compared to a long term average of between two and 2.5 per cent.
Meanwhile, inflation data released last week points to the RBA leaving the cash rate on hold today.
The inflation figure for the three months to December 31 came in at 4.1 per cent, compared to the RBA’s forecast of 4.5 per cent.
This compares to inflation of 5.4 per cent in the September quarter.
While inflation still remains above the RBA’s target zone of two to three per cent, the fact that it is continuing to fall should be enough to prevent another interest rate rise.
