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Banks to pass on full rate cuts in 2013?

Home loan borrowers could receive a bonus this year, with banks under more pressure to pass on the full cut in official interest rates.

Evidence is mounting that their funding costs are falling. Previously, the banks, including ANZ Bank (ASX: ANZ), Westpac (ASX: WBC), National Australia Bank (ASX: NAB) and Commonwealth Bank (ASX: CBA) have only passed on less than the full cut. When the Reserve Bank of Australia (RBA) cut official cash rates by 0.25% in December 2012, the majority of banks passed on just 0.2% to borrowers.

CommBank raised $2 billion this week from overseas investors for three years, at a cost substantially below what it paid last year. The bank will pay investors 44 basis points above the US benchmark rate, compared to 140 basis points last year to issue five-year bonds. While longer-term bonds should be more expensive, the size of the difference shows how wholesale funding costs have fallen in the past year.

Analysts have suggested that consumers shouldn’t get their hopes up, with the banks complaining that high deposit interest rates as well as high funding costs for not passing on the full RBA cut. Deposits now make up a significant percentage of the banks’ funding costs, as people elected to avoid volatile equity markets and stash their cash in high interest bank accounts.

It’s now unlikely that the banks will reduce their deposit rates by much, otherwise they risk losing customers and their main source of funding. The majority of bank accounts pay very low rates of interest, with some paying nothing, in return for other benefits – such as unlimited transactions.

The other question on everyone’s lips is whether the RBA will cut rates this year. National Australia Bank economists have forecast official cash rates to be cut by 0.75% this year, as the economy continues to weaken and unemployment rises.

As the joke goes, economists have forecast 9 of the last 3 recessions – one reason why we leave predictions to others.  The RBA could raise rates this year as much as lower them, or we could end 2013 with the official cash rate unchanged at 3%.

The Foolish bottom line

Should the central bank drop rates, then the pressure will be on the banks to pass on the full cut to consumers – although I could envisage them using high deposit rates as an excuse not to.

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Motley Fool writer/analyst Mike King doesn’t own shares in any of the companies mentioned. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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