Reserve Bank Governor Michele Bullock announced rates would be kept on hold this month. Picture: Christian Gilles / NewsWire
Reserve Bank moves to keep the cash rate on hold at its most recent monetary policy meeting this month could end up actually playing into mortgage holders’ favour, experts have revealed.
The decision announced earlier this month was widely considered a blow for homeowners across the country, who had been eagerly awaiting another cut, but there could be a surprising silver lining.
Economists say the decision to sit tight in July, while not delivering immediate savings, could be advantageous for loan holders over time by increasing public scrutiny on lenders to pass the next cut on in full.
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Banks have historically been reluctant to pass on the full savings of later RBA cuts in an interest rate cutting cycle, often passing on the first cut in full, but only part of additional cash rate cuts.
This trend was even more pronounced when the RBA made a new cut shortly after announcing an earlier cut – sometimes a mere month or two apart. Australia has had two recent cash rate cuts this year, one in February and one in May, and a third cut is expected some time this year.
The Covid-era rate cutting cycle was evidenced as the most recent example of how banks responded to RBA moves over time, with banks only passing on part of the then record cuts to mortgagors.
Canstar analysis revealed a similar trend when the RBA cut rates back in 2015, 2016 and 2019: the first cut was usually passed on in full but the next cuts were rarely passed on in full
This was particularly the case when cuts occurred soon after one another.
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Canstar analyst Sally Tindall said those hunting for a home would benefit from the hold decision.
Finder.com.au mortgage analyst Richard Whitten said the latest hold decision would put more pressure on banks to pass the next RBA cut on in full, giving homeowners on variable rates more relief.
“While it’s impossible to say exactly what will happen with future cuts, we have seen banks and lenders tend to hold back some percentage of rate cuts when the RBA cuts rates multiple times in quick succession,” Mr Whitten said.
“When there’s a rate cut every month consumers and the media lose interest. It’s inevitable. The same story every month just isn’t as exciting.
“With fewer cuts and more space between them, banks have less room to hide.”
HOW MUCH BANKS PASSED ON PREVIOUS CASH RATE CUTS
How the big four banks responded to each cash rate cut historically. Picture: Canstar.
Mr Whitten said both lenders and the RBA were under huge pressure to deliver savings for mortgage holders, but rapid fire rate cuts would have tempted some banks to claw back savings by only partially passing cuts on.
“It’s quite plausible that by spacing out the rate cuts, the RBA’s decision could lead to lenders passing on more of each cut. Because each cut will be a bigger event with more media (and political) attention.
“Of course, that’s probably not factoring into the RBA’s thinking. The bank’s focus is on inflation, employment and the health of the economy.”
Canstar data insights director Sally Tindall said an added group could benefit from the July hold decision: aspiring homeowners.
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Lenders may be under more pressure to pass on cuts when they are further apart.
“While a cash rate cut – if passed on to new customer mortgage rates – would increase a person’s maximum borrowing capacity, it could also encourage more buyers into the market,” she said.
“(This would) increase competition and cause property prices to rise even further. While a cut is still likely, and still likely to accomplish this, buyers already doing the Saturday circuit might now have a handful of extra weeks with less pressure.”
Ms Tindall said banks needed to step up if the Reserve Bank announced another cut.
“No one is expecting mortgage rates to drop back to the record lows of 2021 and 2022, however, after 13 RBA rate hikes (over 2022 and 2023), four of which were doubles, banks cannot baulk at the third cut on the way back down.”
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The big four and the majority of other lenders have passed on both cash rate cuts this year (in February and May) in full. Picture: NCA Newswire
Owl Home Loans director Aidan Hartley said the prospect of banks being more generous in passing on the next cut may only come as cold comfort for most mortgage holders.
“I’d say almost all borrowers would still have rather had a rate cut this month, and took the chance that the banks pass on the rate cuts in full,” he said.
Mr Hartley said anticipation for the next cut was already high and the spotlight would be firmly on banks to see how they responded.
“The RBA is now meeting less frequently than before, meeting every six weeks, whereas previously they would meet every month, so the banks have less of a ‘shield’ against public scrutiny from back to back rate cuts.
“This means borrowers are waiting longer between RBA meetings, and have more anticipation when the RBA does meet.
“The longer delay between RBA meetings also puts pressure on banks to act on rate cuts quickly. If we’re waiting six weeks for the RBA to meet, then banks take another two to four weeks to pass on the cut, and then repayments only actually reduce the following month – it can take a long time before borrowers feel any real benefit in their pockets.”
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