Banks to go it alone on rate cuts

Competition regulator Rod Sims expects banks to cut mortgage rates independently of the Reserve Bank if funding costs continue to fall, and is watching how lenders respond to the improvement on credit markets.

Banks have enjoyed wider profit margins in recent months after a sharp fall in the cost of new wholesale debt, putting renewed scrutiny on their mortgage rates.

While lenders have so far offered discounts to new customers and lower fixed rates rather than change their variable mortgage products, some brokers view out-of-cycle mortgage rate cuts as inevitable.

Mr Sims, chairman of the Australian Competition and Consumer Commission, said he also expected banks to eventually pass on lower costs to borrowers.

"Logically if you, as it were, push up rates independently of the Reserve there must come a time when you push them down," he said this week. "I think it would be absurd for it to be otherwise."

Wholesale funding costs have fallen to their lowest level since 2009, the Reserve said this week. Some analysts also say competition for deposits is waning, giving lenders an opportunity to cut independently of the Reserve.

Mr Sims said he was "a little bit optimistic" smaller lenders would put more competitive heat on big banks, citing Macquarie's decision to team up with Mark Bouris' lender Yellow Brick Road as a promising development. But he would not say when he thought banks may cut rates independently of the central bank, saying "these things take time".

"I'm a little bit optimistic that the others can take advantage of the generally lowering funding costs and be more competitive with the big banks so that we'll have the competition that all Australians want and deserve on this topic," he said.

He said he could see why some people were surprised rates had not fallen, but the ACCC and the Australian Securities and Investments Commission would be "watching closely".

Mr Sims this week approved a deal allowing greater concentration in the mortgage broking sector, with Commonwealth Bank given approval to swallow Aussie Home Loans.

The big four banks dominate the home loan market but profits are facing slower growth as housing credit expands at is slowest annual pace on record.

RBA assistant governor Malcolm Edey said on Friday that banks should get used to the new environment in which credit would grow at the pace of the economy. "On any reading, it seems clear that this will be an environment where it is harder in general for banks and for the system as a whole to grow," he said.