With the cash rate at an all time low and banks being ‘bashed’ for “profiteering” by federal politicians and the media for not passing on the latest rate cut in full, are you wondering where the truth actually lies in all the rhetoric?

To understand the truth you have to start by knowing how mortgages are actually funded.

For starters, funding for mortgages comes from a variety of sources and is not solely reliant on RBA rates.

Secondly, banks have more deposit (savings) customers than they have mortgage (home loan) customers. They also have to balance the needs of all clients in addition to shareholders (which is almost everyone with a super fund).

There are many in the community that don’t celebrate falling interest rates at all – people with term deposits, for instance, who are currently being hit hard with falling interest rates.

Falling rates also squeeze the banks’ interest rate margins and they are already under pressure from a number of factors such as slow loan growth, increased costs and remediation from the Banking Royal Commission (this one was necessary and we are certainly not condoning the banks’ behaviour).

One thing we definitely wouldn’t want to see happening in this country is Australian banks being downgraded by international ratings agencies. Why? Two reasons:

1. It would increase their costs of funding and drive mortgage rates up.
2. Financials make up a third of the ASX 200 and the Big 4 banks make up a quarter. This represents a large proportion of almost every super fund.

There is no question that our national economy needs stimulus to grow. But slashing interest rates is not the only way to tackle this. For instance, the government could spend on infrastructure and get money into the community by increasing Newstart or Pensions where it is likely to be spent.

The RBA only has one lever to stimulate growth – interest rates. As rates get lower and lower this becomes increasingly ineffective. So while the government says it relies on the RBA to do the heavy lifting and publicly blames the banks for not passing on the cuts in full, they are failing to address the full story. It would seem blaming the banks is becoming more of a marketing ploy to deflect interest away from them and pass the buck. The RBA has stated numerous times that interest rate cuts alone aren’t enough to stimulate the economy.