Banks to cut rates this week?

Now that the Reserve Bank of Australia (RBA) has left the official cash rate at 3%, all eyes are on the big banks, to see if they will cut rates outside of the RBA’s monthly cycle.

The ANZ Bank (ASX: ANZ) has moved to a monthly rate decision, independent of the RBA’s decision and is due to announce interest rate changes, if any, this Friday. With the banks’ costs of funding having fallen dramatically, it’s possible we could see cuts to mortgage rates this week, particularly if the ANZ is feeling brave.

All four of the big banks, including ANZ, Commonwealth Bank (ASX: CBA), Westpac Banking Corporation (ASX: WBC) and National Australia Bank (ASX: NAB), have waded into global wholesale funding markets in recent times, taking advantage of a 50% fall in wholesale rates.

Two weeks ago, we saw an unprecedented three smaller lenders cut their variable mortgage rates out-of-cycle. That may put more pressure on the big four.

Financial comparison website, RateCity estimates that the banks have passed on around 1.3% of the 1.75% of cuts to the official cash rate since November 2011. Michelle Hutchison, spokesperson for RateCity says that lenders have room to move, after keeping an average of 0.42% of the RBA’s 1.75% in cuts to the official cash rate, citing high wholesale funding costs as the reason for not passing on cuts in full.

However, banks answer to their shareholders rather than borrowers, so they may be reluctant to cut mortgage rates out-of-cycle. Strong competition for deposits means deposit rates are relatively high, and now form around 54% of the banks’ funding needs, according to the RBA. That could also hold banks bank from cutting their mortgage rates.

Foolish takeaway

New competitors, such as Mark Bouris’ Yellow Brick Road (ASX: YBR), are also pressuring the banks by offering aggressively discounted loans. The big four’s estimated 90% share of the mortgage market could be under threat, unless they take action to cut rates. Home owners will be hoping the good news comes as early as this week.

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