Two bank rate cuts, and two responses

Bank of Canada, Australia Reserve Bank cut rates

Clients of Canadian banks, who aren’t receiving the full benefit of the central bank’s recent 25 basis point rate cut, can take a little comfort.

In at least one other country, whose central bank also cut its key lending rate 25 basis points, customers have also not received the full and immediate benefit.

This week Australia’s Reserve Bank surprised the market with a one-quarter of a percentage point cut in the so-called official cash rate to 2.25% — a record low. While that change shocked the financial sector (one poll had less than 25% of economists predicting such a move), the reduction was justified by low inflation and the sharp fall in oil prices. The Bank of Canada used similar language when it announced its cut.

As in both countries, both of which have experienced house price booms, the effects were direct: the exchange rate fell immediately — making all things foreign a tad more expensive.

But the banks in both countries reacted differently.

In Canada, TD Bank was out front very quickly saying that it would not be passing on the cut, a move that would not be useful for their customers which have loans related to the prime. Meanwhile the other Big Five said nothing officially, presumably hoping that TD would be forced to take all the heat. A few days later — after presumably a few phone calls — the banks fell into line with Royal Bank being the first, quickly followed by BMO — and, in time, the rest.

But the banks opted not to pass on the full cut: instead their customers would have to get by with a change of 15 basis points. The banks — which all cut by the same amount — justified this by indicating there was no direct relationship between the bank rate and the prime rate and that the issue was more complicated because of the workings of the bond market.

This week the Australian banks — and there are four key players — were faced with a similar situation: how to respond to a 25 basis point cut in the central bank rate.

And against the backdrop of the Treasurer who was quoted as saying “I say again to the Australian banks pass it on in full now, not just to home owners, but importantly small business and credit cards as well,” there was a variety of responses.

Westpac and the Commonwealth cut their so-called standard variable rate. The changes go into effect on Feb. 20 — meaning the two have given themselves a considerable grace period.

In Westpac’s case it opted to cut by more than the 25 basis points — though in fairness its standard variable rate was higher than its competitors. Those two banks were followed by a number of smaller regional banks

This Friday, the ANZ Banking Group — one of the Big Four — will make its decision. It will base that call on five factors, one of which is “competitive positioning.”

Given that competition in the bank-lending sector is tough, it will be difficult for the laggards — ANZ and National Australian Bank — not to follow with the full 25 basis points cut.