In a perfect world, monetary policy transmission would flow through to the real economy but sadly...
We don't live in a perfect world. This chart details the funding costs for Australian lenders for 1-month, 3-month, and 6-month tenors. Remember how this was an issue last year when the big banks were raising mortgage rates and pressuring the Australian dollar lower?
Yep, the justification for them to do so has been going down the drain over the past few months and now we're even seeing that funding costs/BBSW rates have even fallen below the RBA cash rate of 1.50%.
The issue here is that despite funding costs falling below the cash rate, the banks don't really have much incentive to pass on that savings to their consumers - or at least not in full. The thinking here is that the RBA is "expected" to cut its cash rate to keep up now so for banks, they will just maintain the status quo until the RBA decides to act. Greed.
But even if the RBA decides to act, it may not be enough unless funding costs start matching the trend that the cash rate is going to follow over the next few months i.e. downwards trajectory. Otherwise, the "high" funding costs will still result in the same issues that we have seen over the past twelve months:
- Here's why Australia's big banks are raising mortgage rates
- The RBA's ability to raise its cash rate has taken yet another hit
- Australian banks begin to ramp up the pressure on consumers
- NAB may be late to the party, but piles further pressure on the RBA
- Funding pressure weighs on Australian dollar
Unless the banks are confident enough that funding costs will fall in tandem with the RBA's cash rate, they are not likely to pass on the full savings to consumers and it will result in the same conundrum that we have seen with regards to household savings/consumption as well as a further drag on the housing market i.e. feedback loop.
If anything else, it feels like the only solution for the RBA at this point is to cut rates even more than once this year; in hope that it will foster sustainable lower funding costs. I reckon that perhaps is part of the reasoning for why we're seeing more aggressive calls for the RBA to cut more this year.