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Banks 'muffling' impact of rate cut

AAP logoAAP 4/08/2016 Colin Brinsden, AAP Economics Correspondent

Australians were in a positive mood in anticipation of the Reserve Bank cutting its official interest rate this week.

While the central bank duly delivered a 0.25 per cent cut in the cash rate, it's not so clear if people will be just as upbeat after the big four banks responded by passing on only half of the official reduction.

ANZ, Commonwealth Bank, National Australia Bank and Westpac reduced their standard variable mortgage rates by just 0.10 per cent to 0.14 per cent.

It means some 80 per cent of borrowers have missed out on the full rate reduction, and only gain a monthly average cut of around $20 on repayments on a $300,000 mortgage rather than over $40.

Whether excuses like rising "regulatory and funding costs", "balancing the needs of both customers and shareholders" and banks facing a "complex domestic and international environment" cut the mustard with their borrowing customers remains to be seen.

We've been here many times before and it's triggered the usual chest-beating from both sides of politics .

At least this time around the big four haven't left savers with a bitter after-taste.

In a novel response, the banks also increased term rates for depositors from between 0.45 per cent to 0.75 per cent, when normally they would be cut with lending rates.

Prime Minister Malcolm Turnbull still wasn't impressed and is demanding a full explanation from the bosses of the major banks as to why they haven't passed on the rate cut in full.

Opposition Leader Bill Shorten renewed his call for a royal commission into the banking industry, saying this latest episode has done nothing to help their credibility.

One assumes central bank governor Glenn Stevens won't be too happy either.

Economist John Edwards, who has just finished a five-year term as a Reserve Bank board member, expects the central bank will be disappointed.

"When you make a decision to cut by 25 basis points ... your intention is to affect household demand and lending and that effect is going to be muffled," Dr Edwards, a former economic adviser to Paul Keating, says.

"It's incumbent on them to consider the economic impact of what they're doing on the economy as a whole and not just on their own profits."

Consumer confidence surged over two per cent last week as thoughts of a rate cut were stirred by figures showing annual inflation at just one per cent, its lowest in 17 years - way below the Reserve Bank's two to three per cent target band.

Stevens - presiding over his last-but-one monthly board meeting before retiring in mid-September - expects inflation to remain low for some time yet given very subdued wage growth and very low cost pressures elsewhere in the world .

Overall, economic growth continues at a moderate pace, albeit with a "very large" decline in business investment.

"The board judged that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting," he said.

He did not believe that a record low cash rate of 1.5 per cent would exacerbate risks in the housing market given recently implemented supervisory measures have resulted in slower lending and more moderate house price rises.

It was the fourth official interest rate cut since the coalition came to power in September, an event not lost on shadow treasurer Chris Bowen.

He points out the cash rate is now half the rate seen during the 2008-2009 global financial crisis in what were described as "emergency levels" at the time.

"This makes a complete mockery of the government's three-word slogan 'jobs and growth'," Bowen says.

And let's not forget former Liberal treasurer Joe Hockey's views on interest rates when he was in opposition.

A month out from the 2013 election, the Reserve Bank cut the cash rate to 2.5 per cent.

"They're not cutting interest rates because the economy is doing well ... the economy is struggling," Mr Hockey said at the time.

"If anyone thinks Labor's doing a terrific job running the economy, they'd be deluding themselves."

What goes around comes around.

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