PM Malcolm Turnbull
Australian Prime Minister Malcolm Turnbull speaks during a news conference in Sydney, Australia, July 10, 2016. Reuters/Paul Miller/AAP

Following reports Australian banks would earn an extra $1.4 billion by pocketing half of the 25 basis points interest rate cut made by the Reserve Bank of Australia (RBA) on Tuesday, borrowers had found an ally. No less than Australian Prime Minister Malcolm Turnbull is critical of the move by the banks not to pass in full the key lending rate cut.

Turnbull points out that the Australian central bank’s move had lowered the funding costs of lenders and keeping part of the rate cut “would jeopardise the social support on which their business depended.” The PM explains, “They operate with a very substantial social licence and they owe it to the Australian people and their customers to explain fully and comprehensively why they have not passed on the full rate cut, and they must do so,” quotes The Australian.

John Edwards, outgoing RBA board member, joined the growing move initiated by the federal Opposition in seeking a royal commission investigation into the lenders. Edwards points out that RBA had intended for commercial banks to pass in full the 25 basis point cuts to home loan borrowers which would be helpful to the Australian economy.

Edwards notes, “When you make a decision to cut by 25 basis points, you know, your intention is to affect household demand and lending and that affect is gonna be muffled,” quotes Sydney Morning Herald. He believes some king of inquiry would be helpful to address the situation.

However, Shayne Elliott, chief executive of ANZ, defended the lender’s move to pocket 11 points of the rate cut because of the rising cost the banking industry face. He acknowledges Turnbull’s point and the need to do better in explaining those dilemmas and the drivers of their decisions to their stakeholders.

David Murray, a former CBA chief executive and head of a government inquiry into banking, sides with the lenders. He cites the weak growth outlook, unprecedented way banks funded since the financial crisis and gradual decline in shareholder returns as reasons the banks could not pass in full to customers the rate cut.

Meanwhile, all banks raised their rates for short-term deposits to compete for additional funds.

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Source: Saxo Bank