Investors, depositors big winners from RBA rate cut

The decision by major banks not to fully pass on the Reserve Bank's official rate to mortgage borrowers demonstrates the power of big investors at a time of tighter profit margins, according to interest rate analyst.

Listen to my interview with RateCity data director Peter Arnold

But Peter Arnold, director of data at the financial services monitoring firm RateCity, says the move by the Big Four isn't surprising and proves that the interests of shareholders is now the number one priority for major banks.

"Protecting those margins, holding back money as equity is now very important. But as a borrower, you're the one who's paying the price here," Mr Arnold told the ABC's AM program.

"There'd be a lot of pressure from shareholders. The bank profits are a big source of income for super funds so the typical Aussie is benefiting in some regards.

"But the big investors are certainly a force to be reckoned with."

The changing priority for banks is in contrast to the past decade when Federal Treasurers including Peter Costello, Wayne Swan and Joe Hockey publically urged banks to pass on rate cuts in full.

Bank chief executives were routinely carpeted in public and private when official rate cuts were held back to protect profit margins.

When the Reserve Bank cut rates in May on federal budget day, three of the four major banks delivered the full rate cut to borrowers.

But yesterday, major banks passed on around half the official reduction with the National Australia Bank handing over just 0.1 percent of the RBA's 0.25 percentage point reduction.

Instead term deposit rates have been sweetened by the Commonwealth, NAB, ANZ and Westpac to ensure depositors - who are hurting from record low rates - keep their money with banks.

Peter Arnold says banks are under more pressure than ever given demands from institutional shareholders along with the Australian Prudential Regulation Authority (APRA) which now requires banks to keep more cash in reserve to deal with potential shocks.

As economists question the Reserve Bank's strategy in taking rates to record lows, there are still fresh memories of banks raising rates independently in the leadup to the global financial crisis when bank funding costs spiralled.

Mr Arnold warns borrowers could be exposed to the scenario of independent rate hikes again in the event of a global shock.

"That could certainly happen again, " Mr Arnold told AM.

"We've seen it before and it's happened this decade. We saw some months where the RBA didn't move and the major banks added 0.1 to 0.5 percent extra on to home loan rates."

While the major banks have held back the full RBA cut, smaller banks without shareholders are better positioned to pass on the full 0.25 percent to borrowers.

The former credit union Bank Australia was the first to move, opening the door for other borrowers to do the same.