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Australia record-low cash rate may spur home lending but pressure bank margins

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Australia record-low cash rate may spur home lending but pressure bank margins

A record-low policy interest rate in Australia may help loan growth rebound further, particularly in the property sector, but lending more at cheaper rates will likely increase pressure on banks' net interest margins, analysts said.

The Reserve Bank of Australia on Tuesday cut the cash rate target, which is the overnight money market interest rate, to 0.75% from 1.00%. The third cut in five months was Australia's response to recent rate cuts in the U.S. and EU, as well as domestic unemployment and weak economic growth.

Mortgage loan growth has picked up again since June, when the RBA started cutting the cash rate after a hiatus of near two years. New mortgage commitments rose 3.9% in July from a year earlier on a seasonally adjusted basis, the strongest growth since October 2014, according to the Australian Bureau of Statistics. July's increase was up from 1.3% year-over-year growth in June, following a 1.6% fall in May.

"The current low rates no doubt contributed to the uptick of house prices in Sydney and Melbourne. A further cut will be a boon for mortgage holders and first-time buyers, as it will lower the lending threshold by 20-25 basis points," Graham Cooke, a researcher at Australian mortgage comparison site Finder, told S&P Global Market Intelligence in an email.

For the fiscal year ended June 30, total loans for all 147 authorized deposit-taking institutions in Australia rose 3.8% from a year earlier, the lowest growth in at least five years, according to the Australian Prudential Regulation Authority. The tapering loan growth was in part due to the royal commission's revelation of the sector's misconduct, which led banks to slow down approving new loans and drove some borrowers to nonbank lenders, as well as to the country's slow economic growth in recent years.

Major banks in Australia such as National Australia Bank Ltd. and Commonwealth Bank of Australia have recently lowered their variable home loan interest rates following the central bank's cut in the cash rate, although they did not pass on the full rate reduction to borrowers.

"Rates are already low, net interest margins are somewhat squeezed. You start cutting rates it's quite hard to push that to the savers. You're going to see your lending rates squeeze," Robert Carnell, head of research and chief economist for Asia Pacific at ING Bank NV's Singapore branch, told S&P Global Market Intelligence.

The latest rate cut, meanwhile, could send a worrying sign to the market about the economic outlook, which may keep some borrowers on the sideline and offset some of the potential loan growth, analysts added.

"If the RBA does go for another cut it is of course stating the obvious that this would be worrying sign, in terms of what it says about what the RBA thinks of the state of the economy,” said Graham White, associate professor at the School of Economics at the University of Sydney.