As they say, timing is everything.

For the Commonwealth Bank, having the Prime Minister verbally lambast the Big Four for not cutting rates after the Reserve Bank of Australia (RBA) cut the cash rate to 1.25% was one piece of PR it didn’t really need.

 

 

Keeping (a straight) face

That’s not all. This morning analysts are speculating that Australia’s largest bank is set to announce a yearly profit of almost $9.3 billion when its results are released on Wednesday. (Coincidentally, this is the same day that outgoing Governor of the RBA delivers his last speech before ending his tenure)

On the surface, refusing to cut rates and accumulating a record profit fly in the face of each other and there is every reason for mortgage holders to get upset. However, drill down a little further and Commonwealth Bank might just have a valid argument for its actions.

 

 

Cash accounts vs term deposits

Banks love the fact that Australians keep the majority of their electronic funds in easy-to-access savings accounts – the kind you deposit your pay into and then withdraw for weekly bills and discretionary spending.

This is quite different to medium-to-long-term deposits that attract a higher interest rate. In fact, Australians have only 40% of their funds in these type of accounts, which means that the banks have a much lower interest obligation than if more of that money was kept for the long-term.

This move could also dampen the RBA’s desires to ease pressure on the Australian dollar – especially if the higher rate for term deposits attracts a lot of international investment. Combine this with the reluctance of the banks to pass on the full cut to mortgage holders, and Glenn Stevens must be very happy that any decision to pull one of Australia’s remaining financial levers will lie with someone else.

 

 

New rules for loan funding

By 2018, new finding arrangements become law. These changes will require banks to source a lot more cash to secure any loans they issue, a move designed to ensure that banks can remain liquid under external threats.

The easiest way for the banks to accumulate these funds to attract more term deposits, and the actions of the last week certainly suggest this is happening. By using almost half of the latest cut to lift interest rates for term deposits, the banks are getting in ahead of the deadline to ensure they can comply with the new requirements.

 

 

A competitive market

At the end of the day, there is absolutely no obligation for the banks to lower interest rates. It’s a competitive market, and they are free to choose how much of the RBA’s cuts is passed on.

Sam Dastyari might be right when he says that Australians change spouses more often than they change banks, but at the end of the day, mortgage have plenty of options when it comes to deciding who to borrow money from.