NAB's rate cut pledge

Good news for home owners with a mortgage! National Australia Bank (NAB) has gone public with a promise that if the Reserve Bank of Australia (RBA) cuts rates by 25 basis points in September, NAB will pass that reduction on to customers. NAB chief executive Ahmed Fahour said that a recent easing in short-term funding costs had enabled NAB to make the commitment to reduce its standard variable rate. "While we continue to see volatility in international markets and increases in the average cost of long-term funding, we have experienced some short-term funding relief, which we are keen to pass on to our customers," Mr Fahour said.

While other banks have been reluctant to make any similar commitment, they will now be under considerable pressure to do likewise. Analysts believe they will fall into line with NAB when the Reserve makes its rate announcement. ANZ indicated last night it was likely to pass on the full benefit of any official cut by the RBA to home borrowers. "If the current funding environment remains as it is, and the RBA cuts, the likelihood is we'll be passing on the benefit to home borrowers," said ANZ's Paul Edwards.

While this is encouraging news, what happens if the RBA cuts by 50 points? NAB has only given an undertaking to pass on the full rate cut in the event of a 25 point reduction.

I think it is highly likely that as rates continue to fall over the next several months, the major banks will take some opportunity to increase their lending margins by not passing on a full RBA rate cut or two at some stage in the easing cycle. What do you think?

(references: Herald Sun, 22 August 2008; National Business Review, 22 August 2008)