Rates take a variable turn at ANZ

ANZ will reprice home and small business loans in Australia on a monthly basis from now on, with future changes in rates linked - how is yet to be specified - to the bank's cost of funds.

The bank announced the change in pricing approach in conjunction with a cut in its standard variable rate of 25 basis points on home and small business loans. The new variable home-loan rate for ANZ will be 7.30 per cent.

After ANZ broke the short lived stand-off among the major banks, National Australia Bank, Commonwealth Bank and Westpac also announced cuts of 25 basis points on home loans. NAB and Westpac also said they would cut rates on variable-rate business loans by 25 bps.

NAB also said it would cut some deposit rates by 25 bps, though, at this stage, deposit rates for its UBank brand are under review.

ANZ said it will announce future pricing changes for retail and small business variable-interest rates on the second Friday of each month.

At present, ANZ, like most banks and many other lenders, usually makes changes in key consumer loans only in the wake of changes in the cash rate announced by the Reserve Bank of Australia.

However, the bank has been considering a shift in its pricing practices for more than a year, and it elected to make the change now in the context of another round of media and government cajoling of the banking industry over the need to promptly adjust home-loan rates to reflect changes in the cash rate.

"We just wanted to get out of being part of this exercise where the RBA announces and we are expected to move the next instant," Chronican told ABC radio.

"We want to break the nexus that when the RBA moves, we move."

The impact on ANZ's margins in the short term are hard to gauge, though in the longer term the change may mean more stability in the bank's margin on its mass market lending in Australia than in the recent past.

In the media release announcing the change yesterday, Phil Chronican, ANZ's chief executive for Australia, wrote that "retail banking margins have been contracting as the cost of funds has progressively risen over the last six months."

Chronican confirmed, in follow-up interviews, that margins would fall once more because of the 25 bps cut in home loans rates.

ANZ is yet to work out the operational features of its new pricing policy. The bank may prefer to avoid small changes in variable lending rates each month, and it is not clear what parameters will inform the choice of margin and how flexible that margin will be over time.

Had ANZ followed a cost of funds benchmark in repricing its home loans this month it might have cut the variable rate by only seven basis points (using as an illustration its cost of funds, in its Australian retail portfolio, as a guide).