Reserve outcut as ANZ steals a march on rates

ANZ Bank has thrown down a challenge to its big-bank rivals, cutting home loan interest rates by a bigger margin than the Reserve Bank for the first time in this cycle of rate cuts.

ANZ Bank has thrown down a challenge to its big-bank rivals, cutting home loan interest rates by a bigger margin than the Reserve Bank for the first time in this cycle of rate cuts.

After banks last year repeatedly failed to pass on official rate cuts in full, ANZ on Friday lowered mortgage rates by 0.27 percentage points, more than this week's official cut of 0.25 percentage points.

The move takes ANZ's standard variable mortgage rate to 6.13 per cent, equal to NAB, which has had the cheapest advertised mortgage rates for almost four years.

The decision to outcut the Reserve is a response to falling funding costs and competition between lenders for home loan customers, and could see a return to a trend not seen for more than a decade.

CLSA analysts said the last time a similar trend emerged, where banks were forced to surpass the Reserve's rate cut, was in the late 1990s, when Aussie Home Loans sparked an outbreak in mortgage competition.

The decision also comes against a backdrop of strong profit growth, with the major banks set to hand down combined earnings of more than $26 billion this year.

Phil Chronican, the chief executive of ANZ's Australian business, said the move was driven by a fall in funding costs and a plan to steal market share from its rivals.

Banks extract a significant chunk of their profits from the $1.1 trillion mortgage market, and Mr Chronican signalled competition was heating up in the sector.

"We've been monitoring action both through the bank's own channels and through brokers, and I think we've now got to the situation where almost all the banks are saying publicly they expect to grow in line with the system as a whole," he said. "Obviously that's pretty hard to do unless somebody's losing share, so we can expect this to be a pretty competitive market."

ANZ has been the most aggressive in trying to sever the long-standing link between Reserve Bank decisions and movements in mortgage rates, saying in December 2011 that it would review interest rates each month, independently of the central bank.

"Having asked our customers to bear some of the funding cost increases over the last year or two, when we saw the opportunity to pass a little bit back to our customers we thought it was appropriate to do that," Mr Chronican said.

He said he did not expect a mortgage price war, referring to NAB's pledge to offer the lowest mortgage rates of the big four in 2011, only to later line-up with its rivals.

ANZ, which has the smallest presence in the mortgage market of the big four lenders, has also been aggressively expanding its market share in recent months.

The cut is the first time a major bank has given borrowers a bigger reduction in rates since the Reserve began its latest cutting cycle in November 2011.

Since the global financial crisis, the gap between the cash rate and mortgage rates has blown out from about 125 basis points to near 250 basis points. With costs now falling, banks are under pressure to return savings to borrowers.

NAB chief executive Cameron Clyne conceded on Thursday that it would be harder to hold back part of any future interest rate cuts from borrowers, because the war for deposits that was pushing up costs has eased.

The Greater Building Society on Thursday cut its standard variable mortgage rate by 0.3 percentage points, to 5.75 per cent.

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