Home Buyers To Get Bigger Bonus Than Expected

The Age

Wednesday October 8, 2008

Marc Moncrief

MORTGAGE holders will receive the biggest cut to their home loan rates in 16 years after a historic move by the Reserve Bank, despite lenders rejecting calls to pass on the full 1 percentage point rate cut.

Shocked by the size of the RBA's announcement, some banks took hours to respond to the highly anticipated monetary policy decision. The RBA has not cut rates by 1 percentage point since May 1992.

Westpac was the first bank to announce a cut of 0.8 percentage points to its standard variable loan.

The Commonwealth Bank followed, then National Australia Bank, ANZ and St George. Each duplicated the 0.8 percentage point cut.

"We see today's RBA statement, and in particular the 100 point cut in the cash rate to 6%, as an attempt to be pre-emptive and try to stabilise economic and financial conditions in very uncertain times," said NAB chief economist Alan Oster.

Dr Oster predicted interest rates would be lowered by a further percentage point over the next five months - taking the cash rate to 5% - with the first instalment of half a percentage point next month.

Had the banks passed on the full 1 percentage point drop, it would have cut $215 a month from a $300,000 mortgage, according to the Housing Industry Association. The banks' less-than-complete reduction means they will keep about $40 of the change.

Ross McEwan, head of retail banking at Commonwealth Bank, said the bank had cut "as much as possible" and promised that, when the financial turmoil ended, the bank would "reduce rates by more than the RBA adjustments". He also promised to cut rates without cues from the RBA.

Other banks referred to future rate cuts, but stopped short of promising cuts outside the RBA cycle.

ANZ chief economist Saul Eslake said language in the statement accompanying the announcement made clear the RBA did not expect banks to hand down the cut in full.

RBA governor Glenn Stevens said in the statement that "an unusually large movement in the cash rate was appropriate in order to bring about a significant reduction in costs to borrowers".

Mr Eslake said the emphasis on borrowers meant the RBA wanted its cut to be substantial enough to cut through banks' resistance to lower rates.

"I would interpret that as recognition that whatever they did would not be fully matched by the banks," Mr Eslake said.

Treasurer Wayne Swan said he expected the banks to fully pass on official interest rate cuts only "when conditions normalise", warning it was "reckless behaviour" to pretend borrowing costs had not gone through the roof.

Prime Minister Kevin Rudd said in a speech in Brisbane that the RBA had to balance delivering relief to borrowers without sacrificing "the stability of the banking system".

But Opposition Leader Malcolm Turnbull continued to argue the banks were profitable enough to pass on the entire cut. "We maintain that the Australian banks can afford to pass on the entirety of this cut," he said.