For most of the period since ANZ Bank adopted its unique approach to setting interest rates in late 2011 its departures from its peers have been largely about timing rather than direction. That makes today’s decision to reduce rates by more than the Reserve Bank’s 25 basis point cut in official rates quite significant.
Where the other banks promptly, indeed uncharacteristically so, passed on the 25 basis points, ANZ stuck to its two-and-a-half year routine of making decisions on rates on the second Friday of each month – and cut its headline mortgage rate by 27 basis points.
In doing so it undermined the claim NAB has been able to make ever since its 'Breaking Up' campaign of having the lowest mortgage rate, albeit a claim that has had steadily reducing conviction as the gap between NAB’s rate and its peers narrowed to a couple of basis points.
Today ANZ and NAB share the status of having the lowest headline mortgage rates, with their 6.13 per cent home loans marginally cheaper than Commonwealth’s 6.15 per cent, but meaningfully lower than Westpac’s 6.26 per cent.
Since announcing it would de-synchronise its rate decisions from the Reserve Bank’s, ANZ has at times moved its key variable rate mortgage pricing differently to its peers, but that was during a cycle where the major banks were holding back some of the Reserve's rate cuts and essentially ANZ’s departures were more about timing than magnitude.
ANZ could have simply followed the Reserve Bank and its peers, passed on the 25 basis points, and would have received the same generally (and unusually) positive response that they did for not retaining any of the reduction. Instead it added a couple of basis points in a statement of its independence from its peers and, presumably, a signal of greater aggression in the market.
The decision tends to underscore the yet-to-be fully exploited tactical potential of ANZ’s different approach to setting its rates. In those months where the Reserve Bank's decision falls within the first week of the month, ANZ is able to sit back and watch what its peers do and therefore has the option of acting differently on the basis of that knowledge.
To properly break the traditional cycle of major bank rate movements, where they respond to the Reserve and, in the post-crisis period, where the major decision has been how many basis points they hold back from the Reserve’s decision, ANZ needs to get its customer base used to it acting differently by consistently making small departures from the actions of the central bank and the other three big banks.
Cutting rates by more than the Reserve Bank and its peers would also open the option of lifting rates at a different moment and/or by a different amount to its peers in future if ANZ can convince its customers and potential customers that they aren’t worse off. Today’s decision would help build confidence that ANZ’s different approach isn’t designed to disadvantage them relative to customers of other banks.
ANZ could afford to be a little bit different. It produced a very strong interim result recently, albeit one driven by cost-cutting and improved credit quality, within an environment of very modest growth in demand for credit from both business and consumers.
Like its peers, it has very strong capital and liquidity positions and has re-made the profile of its funding to lengthen its duration and reduce its exposure to potentially volatile wholesale debt markets. In common with the other majors, it has also significantly improved its deposit-to-loan ratio, with deposits providing 61 per cent of its funding.
There is still competition for deposits but without any meaningful balance sheet growth it is less intense than it was when the banks were scrambling to refinance their maturing wholesale borrowings with more stable sources of funding, which enabled them to pass the full benefit of the Reserve Bank through to mortgages and, in ANZ’s case, to do a little bit more.