How Much of an RBA Cut Should Your Bank Actually Pass On? A Methodology
When the Reserve Bank of Australia (RBA) lowers its cash rate, borrowers often expect their mortgage rate to fall by the same amount. In practice, the amount passed on varies from bank to bank and from loan to loan. This article outlines a methodology for understanding and assessing how much of a cut your bank might pass on.
What does the RBA cut actually target?
The RBA’s cash rate is the target for the interest rate on overnight funds in the interbank market. It influences the cost of funding for banks, but it is not the only factor. Banks raise funds through deposits, wholesale markets, and other sources, each with its own pricing dynamics. Therefore, a change in the cash rate does not automatically translate into a matching change in mortgage rates.
How do banks decide how much to pass on?
A bank’s decision on how much of a rate cut to pass on to variable-rate borrowers is driven by its cost of funds and its competitive position. If a bank’s funding costs fall by the same amount as the cash rate, it may pass on the full cut. However, if its funding costs don’t move in lockstep, it may pass on less. Competitive pressure also matters: if rivals cut more, a bank may be forced to follow to retain customers. Banks also consider their profit margins and the cost of maintaining service levels.
What should you check when your bank announces a change?
When your bank announces a rate change, ask these questions:
- How much is the cash rate cut? The RBA’s announcement gives a clear reference point.
- What is your bank’s announcement? Compare it to the RBA’s move.
- If the bank passes on only part of the cut, ask for the reason. It might cite funding costs or other factors.
- Check if the change applies to your specific product and rate type. Some loans may have different conditions.
- Remember that the pass-through can differ between lenders and even between loans from the same lender.
Using this methodology
This methodology helps you avoid assuming that a full RBA cut should automatically mean a full cut on your mortgage. It gives you a framework to assess your bank’s decision. By checking the RBA’s move, your bank’s announcement, and the reasoning behind it, you can better understand what you are getting. If you are not satisfied with the pass-through, you can consider your options, but this methodology focuses on the decision-making process rather than advising a specific action.
For more information on how your rate is set and what factors affect it, consider these related guides: