Banks have rushed to pass on the official interest rate cut to their home loan customers in full, as lenders try to tempt debt-shy consumers into borrowing more.
Commonwealth Bank, Westpac, National Australia Bank, Suncorp and Bank of Queensland all reduced their mortgage rates by 0.25 percentage points on Tuesday, hours after the cash rate was cut to 2.75 per cent. ANZ will make its decision at its regular interest rate review on Friday.
Banks' haste to cut rates by the official move stands in stark contrast to their failure to pass on the 0.5 percentage points in official cuts late last year, which lenders blamed on higher funding costs.
Since early this year, there has been a sharp fall in the cost of borrowing on global debt markets, and some analysts say there is less competition for deposits, a key source of funding for banks.
Banks also hope lower interest rates can reignite home lending, a critical source of profits. Housing credit is growing at its slowest annual pace since Reserve Bank records begin in 1977, despite its attempts to stimulate activity.
Westpac's executive in charge of retail and business banking, Jason Yetton, said he hoped the cut in borrowing costs would boost consumer confidence, and encourage residential lending. "With headline mortgage rates now at their lowest level for 3½ years, we know this reduction is the kind of incentive our customers are looking for to make the most of the opportunities available in the housing market," he said.
Banks have also faced growing scrutiny over their strong profit growth. ANZ and Westpac last week reported annual profit growth of 10 per cent or more, and announced higher dividends.
However, NAB's group executive in charge of personal banking, Gavin Slater, said the decision was a response to customer needs.
"This decision was fundamentally about our customers, and really we've had a track record of passing on benefits to our customers," he said.
NAB has offered the lowest standard variable mortgage rate of the big four for almost four years, though the gap between it and its rivals has narrowed in the past year.
Despite the banks' move to pass on the official cut in full on this occasion, Mr Yetton said there was still "fierce" competition among banks for deposits - and this was the main influence on the banks' funding costs.
"Deposits have become increasingly important to us as we reduce our reliance on other sources of funding to support our lending. The price of deposits remains elevated," Mr Yetton said.
Banks' interest rates on deposit accounts remain under review.
What the economists have to say
"[The Reserve appears to be saying] it is less confident that other sectors of the non-mining economy will strengthen as it hopes to offset the slowing in mining investment ... we would expect many to characterise the move as insurance."
ANZ chief economist,
"The Reserve's views on global growth, domestic growth and the transition to non-mining-led growth seem little changed. Instead, the Reserve has used the lower-than-expected (inflation data) to take the opportunity to speed up the baton pass to the non-mining sector."
"It comes as a surprise that the Reserve hasn't chosen to take a more cautious approach in reading some of the recent soft economic data, which tend to be volatile month-to-month."
St George Bank chief economist,