KERRY O'BRIEN: At the time of the last big cut, at least one of the big four banks warned that their capacity to pass on future rate cuts was diminishing rapidly.
Why is that, and are we going to see the situation where even when the Reserve does decide to cut rates significantly further, that the benefit of that is not going to be flowing on to the economy via lower bank interest rates?
GERARD MINACK: Well, banking's a pretty simple game - you pay someone to take their money at that, you lend it out at a higher rate and you've got a spread.
Now, because deposit rates are so low, maintaining that spread becomes difficult as you push the cash rate down. So the bank margin
between what they're paying depositors and what they're charging their mortgage holders starts to shrink, and it affects the economics of the banks. So, that's the first issue that means that there may be a limit to how far the RBA can cut the cash rate and get the flow on benefit to mortgage holders.
The other issue is, because we are selling bank debt to foreigners, they're obviously very concerned about the currency, the Aussie dollar
. They don't want to own a bit of paper that's in a currency that's falling. Now, if we rapidly kept cutting rates, there was a concern possibly that the Aussie dollar could fall and that would discourage people from supporting the banks via debt markets. So there's two possible limits on how far we can push the reduction in mortgage rates.