Australia’s big banks are profiting from a period of rapid interest rate increases, with margins getting fatter and share prices rising. At the same time, many households are feeling the strain of rising mortgage rates and inflation-fuelled costs for food and electricity.
While the banks have been quick to pass on the nine rate increases from the Reserve Bank starting in May last year, they did not pass on all of the cuts that preceded it.
After a long period of stable rates, the RBA cut the official cash rate from 1.5% to 1.25% in June 2019. This was followed by five more cuts in the lead-up to and early months of the Covid-19 pandemic.
You can see all of the changes to the RBA cash rate since 2019 in the graphic below. The RBA began cutting rates – already at historic lows since the global financial crisis – in mid-2019. There were two cuts in March 2020, the second in response to the pandemic.
ANZ was the only major retail bank to cut its variable home loan rate a second time in March 2020, as part of its Covid support package, according to data from the comparison website Canstar, although it did not pass on the full cut.
The Australian Competition and Consumer Commission has begun an inquiry into how banks set interest rates for savers, given the recent rate rises have not been passed on in full to deposit accounts.
The data shows that for loans, the big banks do not automatically pass on reductions when the official rate is cut, but they do pass on increases.
The official cash rate is now 1.85 percentage points above those pre-June 2019 levels. But over that same period, the standard variable home loan rate offered by all four major banks is up more than two percentage points, according to Canstar data.
The change in the standard variable rate at the Commonwealth Bank, the country’s largest lender, is more than half a percentage point higher than the cash rate over this time, after it did not fully pass on five cuts across 2019 and 2020. The CBA recently posted a record half-yearly cash profit.
National Australia Bank has also recently posted a huge rise in quarterly profit. Both CBA and NAB have acknowledged rising interest rates as a driver of higher revenues. Both banks are enjoying increases in their margins, as the difference between the interest they earn on loans and amount they pay depositors – captured by the net interest margin – has increased.
