Why don’t our banks pass on the full interest rate cut?

As each interest rate cut is announced by the Reserve Bank, it is becoming more and more common for banks not to pass on the full rate cut. So why is this the case? Why don’t our major banks “do the right thing”?

In Australia the banking system is dominated by four major banks who enjoy a commanding 92% share of the market. This means the major banks can all watch what their competitors are doing and set their rates accordingly, with no incentive to offer below the market.

Secondly, banks need to raise money in order to offer lending products and rely on investors to make deposits with the bank. Naturally investors want to place their money with the bank offering the highest interest rate. This in turn means that a bank needs to offer a higher lending rate to its lenders to retain profit margins.

Finally, banks rely on a number of sources to raise money. If the cost to raise money from these other sources is not reduced in conjunction with the Reserve Bank’s rate cut, then it makes sense for a bank not to pass on the full rate cut.

Whilst its frustrating for all mortgage owners, its really just comes down to dollars and cents!