19 Jun 2009

Australian banks did not pass on all official rate cuts

1:26 pm on 19 June 2009

Australian banks have protected their margins by not passing on all of the last round of cuts to official interest rates, research by the country's central bank has shown.

The Reserve Bank of Australia (RBA) paper, published on Thursday, shows the banks' domestic average net interest margin - a main indicator of bank profitability - has risen recently, offsetting falls that occurred in the early stages of the global financial crisis.

The banks had failed to pass on all of the RBA's official cash interest rate cuts since September 2008 to customers as they tried to offset the higher cost of borrowing new funds in wholesales debt markets.

By not passing on all the official cuts banks have restored their margins, affecting small businesses in particular.

The major banks have reduced their variable housing lending rate by an average of 385 basis points since September 2008.

"This is less than the reduction in the cash rate of 425 basis points, but more than the reduction in their average funding costs of 330 basis points," the paper said.

The report used data extending until the end of May. Since then, most major banks have announced increases in their home loans rates, citing higher funding costs.