News Service from House Harris

Big Four all match RBA rate cut, warn of higher funding costs

SYDNEY, Feb 4 AAP - The big four banks will pass on the full central bank interest rate cut but warn it will be harder to do so in future.

National Australia Bank (NAB) and Commonwealth Bank of Australia (CBA) announced the full one percentage point reductions on Wednesday, following similar cuts on Tuesday by Westpac Banking Corporation and ANZ Banking Group.

All four banks, which together hold 86 per cent of the home loan market, have warned that high funding costs in wholesale markets will make it harder to pass on in full any future cuts by the Reserve Bank of Australia (RBA).

The rate reductions by the big four, as well as cuts by Westpac subsidiary St George, mean most mortgage holders may benefit from the RBA's 100 basis point cut in the overnight cash rate on Tuesday to a 45-year low of 3.25 per cent.

Policymakers are hoping the extra money in people's pockets from the rate cuts and the government's second economic stimulus package, will encourage economic activity, or at least accelerate the reduction in household debt.

The RBA has more than halved the interest rate by four percentage points since September and most of that has cut been passed on to mortgage holders by the banks.

NAB said in its statement on Wednesday that its 3.87 percentage point reduction to its variable home loan rate since September was equivalent to an $806 saving per month on the average $250,000 25-year mortgage.

"We continue to look for ways to pass on savings to our customers, particularly during these economically turbulent times," NAB retail banking general manager Lisa Gray said in a statement.

"It is important to acknowledge, however, these latest rate cuts have come at a time when our funding costs are at very high levels and we may not be in a position to pass on full rate cuts in the future."

The banks need to borrow money in wholesale markets, to then lend to customers, because their deposit holdings are insufficient to cover the loans.

NAB, the biggest bank by assets, and CBA, the largest home loan lender, will both drop their standard variable mortgage intererst rate by 100 basis point to 5.74 per cent, the lowest rate among the big four.

Westpac, the biggest bank by market value and second biggest home loan lender, was first to slash rates on Tuesday, saying it would drop its standard variable rate to 5.91 per cent.

Its recently acquired subsidiary, St George, also announced a 100 basis point rate cut to 5.89 per cent.

Westpac's rate is higher than NAB and CBA, but the reduction will kick in earlier, on February 9, instead of on February 13 like the other three.

ANZ, the Australian bank with the biggest operations in Asia, also cut its rate to 5.91 per cent on Tuesday.

Regional banks Bank of Queensland, Bendigo and Adelaide Bank and Suncorp-Metway say their rates are still under review.

These three banks together hold about seven per cent of the home loan market.

"We are pleased to announce that Commonwealth Bank customers will benefit from the full interest rate cut on all variable home loan rates," CBA retail banking services group executive Ross McEwan said.

CBA echoed the other banks in warning that the high costs of its own borrowings meant it may not be able to pass on future rate cuts in full.

"As the world economic crisis continues and the current pressure remains on funding costs, any future changes in interest rates will need to reflect these higher costs of funds," CBA said.

CBA holds 27.7 per cent of the home loan market, Westpac has 25.8 per cent while NAB and ANZ hold a little over 16 per cent each, according to Australian Prudential Regulation Authority figures.