The cash rate cut has been passed on in full by the big banks and others which has both positive and negative repercussions for borrowers and the economy. In this fortnights update we talk about the virus crisis and how you can benefit from the cut.
All for one and one for…
The history books?...
Last week the RBA cut the cash rate by 0.25% down to the lowest rate on record to 0.50%.
The big banks quickly cut their rates by the same amount. The orchestrated coordination of the simultaneous pass through of the 25-point cash rate cut by the big banks last week is a historical moment.
Not since 2015 has a full rate cut been passed through so hastily or by all the banks, meaning this last one is, which is the last one they will act like this on, momentous.
There was significant political pressure on the big banks to act the way they did.
Including, the ASIC mortgage pricing review the Treasurer J-Fry launched earlier this year, on-going social reputation fallout from the royal commission and dissatisfaction from borrowers.
And it has affected different people in different ways.
From the banks perspective they didn’t really have a choice. Now their profit is under pressure.
From a borrower’s perspective they save a few dollars on their home loan.
From a depositor’s perspective their cash is now burning away as the rate they get paid by the bank for holding their cash is at all time lows.
From an investors perspective it hurt, with all of the big banks share prices falling between 2.5% and 3.3% immediately following the announcements. Dividend likely to fall as well.
So, the question is - who was it for?
The short answer is that they all acted in a self-interested way.
This might sound odd given the share price decline and decline in profitability, but ultimately it is short term pain for long term gain.
The large banks control over 80% of the finance market in Australia and they want to keep it that way, by acting in unison and on a united front they are actually acting in a consistent way as market makers.
Their decision put a huge amount of pressure on second tier and smaller lenders to pass on the full rate cut, which is a lot harder for them generally speaking because their cost of capital is much higher. Many small lenders have already passed on the full cut but they most likely would not have if there was a range of pass through from the big banks.
If smaller banks could have passed on less, like a big bank did, they would have.
The big banks forced the market to follow and it will ultimately benefit them.
Even through the Net Interest Margin from the banks is now suffering.
We have talked before how the NIM is a key driver of profitability for banks, essentially being the cost for them to borrow money at which they on lend to other people at a higher rate, keeping the difference as income.
The NIM will continue to fall with the cash rate and bank profits and market share.
Virus crisis
If you take global share markets as an indicator of sentiment it tells you a story of fear and panic.
As of time of writing the fear and panic that the newest global virus has induced has wiped out all-time highs of share markets around the world, stopped supply chains causing panic buying and is continuing to mount a death toll as infection rates climb.
The panic button was pushed, and the fear will reverberate through markets for months, of not longer below the surface, and we here in Australia have not yet felt the full implications.
While I’ve commented in the past that Australia would hit a recession in 2020 the driving factors influencing that call (unemployment, debt, housing) did not include a global pandemic.
This sudden swing from a budget surplus to recession because of the virus is worrying and few major things have recently happened.
The World Health Organisation (WHO) has finally declared a global pandemic. Surprising no one who thought the WHO should have done this weeks ago.
Major law firms and a bank in Sydney have evacuated their offices due to employees be suspected to have the virus.
Banks have split their teams in half and making them work from separate locations to avoid any contamination and ensure they can keep operating.
US stock market had shut down as a circuit breaker to avoid another black Monday. The longest bull market run in history has stopped.
Trump has banned travel to the US from Europe for 30 days.
Total global infection rate is over 120,000 people. Australia about 0.001% of the total, with the government saying they think in NSW 1 in 5 people (1.5M) will contract the virus.
But the biggest thing is that yesterday the government announced a major stimulus package to deliver a $17.6 Billion dollar boost to the economy. Including hand outs for people in pension, small business, tourism and more.
Time will tell if this will technically save Australia from a recession.
Unfortunately, we have not seen the bottom of all of this as things are going to get worse before they get better.
Especially for the property market.
We are going to see a material slow down in price growth and activity. It is likely the property market will be drastically affected as even open homes are cancelled as vendors get scared to let so many strangers walk through their homes.
How can you sell a house if no one can see it?