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Banks aren’t doing enough to pass on interest cuts

Asleep on the job? Banks aren't passing on cuts. Picture: Shutterstock

Asleep on the job? Banks aren't passing on cuts.

Productivity Commission says home loan rates aren't falling as expected.

Ever get the impression your bank isn't racing to lower your interest rate when official rates from the Reserve Bank of Australia are cut? You're not the only one.

A new draft report from the Productivity Commission into competition in Australia's financial system concludes that banks are no longer changing rates in response to the official RBA rate:

The fall in the cash rate does not appear to have been fully passed on in lower prices across the board. Instead, the spread between home loans and the cash rate for example has largely increased in recent years.

In other words: when the interest rates that banks get charged get lower, they increasingly tend to pocket that as profit, rather than cutting costs for consumers.

In doing this, banks appear to be taking advantage of a reluctance to switch. "Little switching occurs — one in two people still bank with their first-ever bank, only one in three have considered switching banks in the past two years, with switching least likely among those who have a home loan with a major bank," the report notes. That's despite that fact that existing customers are typically paying at least 0.3% more a year than new loan customers.

(You can grab the full report here if you're curious, but be warned, the complete document is 640 pages long.)

This might seem like an odd issue to be raising given that official rates have been at record low levels for some time. The official cash rate hasn't changed from 1.5% p.a. (a historic low) since way back in August 2016, and this week the RBA decided to stick with the status quo yet again.

However, if the historic association between official and commercial rates completely disappears, then it means that the RBA has lost one of its more effective levers for trying to manage the economy, and might have to start exploring other alternatives.

Will the report make any difference? Not necessarily. Government-commissioned inquiries don't always result in any shift in policy, no matter what evidence is presented. In any case, the final version of the report isn't due until 1 July this year. That's in the new financial year and after this year's federal budget, so even if changes were seen as a good idea, we'd be waiting several years to see them implemented.

As a consumer, your most powerful weapon isn't government policy: it's making sure that you're on a home loan with a competitive rate. As you can see if you check out our home loan search tool, there's a wide range of rates on offer. If you're paying 4% or more on a variable rate loan, it's definitely worth looking into a switch, as you could easily save thousands of dollars on a typical mortgage.

Angus Kidman's Findings column looks at new developments and research that help you save money, make wise decisions and enjoy your life more. It appears regularly on

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