Australia’s biggest bank on Thursday said it would pass on any cut in official interest rates to customers, lessening the need for a more aggressive easing by the country’s central bank.

National Australia Bank <NAB.AX> said it would lower its variable mortgage rate by 25 basis points if the Reserve Bank of Australia (RBA) cut its 7.25 percent cash rate by that much in September, as many expect.

The pledge countered speculation the commercial banks might not follow any easing by the RBA and lessened pressure for a more aggressive initial cut of, say, 50 basis points.

“There had been a worry the banks wouldn’t follow and that would make monetary policy look ineffective,” said Brian Redican, a senior economist at Macquarie Bank.

“Now with NAB saying it will pass on the full 25 basis points, it just takes away the main argument for the RBA to go 50,” he added.

NAB is the first of the major banks to guarantee it would fully match the central bank if it cut the cash rate by 25 basis points at its next policy meeting on Sept. 2.

Interest rates are a charged issue in a country with some of the highest household debt levels in the world and the banks have been under intense political pressure to match any move by the RBA. Treasurer Wayne Swan was quick to welcome NAB’s decision and pointedly called on all other banks to follow.

Earlier this week, the RBA signalled there was a case for an early cut in rates as domestic demand had clearly slowed and there was a risk of a deeper downturn in the economy.

The weakness of consumer demand was highlighted by government figures on vehicle sales out on Thursday, which showed a steep 3.4 percent drop in July.

Sales were down 4.1 percent on July last year, with gas guzzling sport utility vehicles alone off 11.9 percent in the face of high petrol prices. The RBA has been particularly keen to counter the deadening impact of the global credit crunch, which was forcing up funding costs for financial institutions here, leading them to lift mortgage and business rates.

NAB’s Executive Director and CEO Australia, Ahmed Fahour, noted that the bank’s total cost of funds was around 57 basis points above the 7.25 percent cash rate, compared to an average of just 17 basis points before the crisis began last year. Fahour said short-term rates had fallen in the last few weeks as the RBA shifted to an easing bias, but the cost of long-term funding and retail deposits was still high and rising.

Indeed, he cautioned that any further cuts in NAB’s mortgage rates beyond September would have to reflect this pressure on funding costs.

“While I am pleased to make today’s undertaking, our medium- and long-term funding and our retail deposit base represents the greatest proportion of our funding costs and the average cost of these sources of funding continue to increase,” said Fahour.

Source: http://www.afxnews.com

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