Why Big-4 Banks Don't Pass On Full Rate Cuts: 2026 Pattern

Introduction

In February 2026 the Reserve Bank of Australia cut the cash rate target by 25 basis points to 3.85 per cent. Westpac, Commonwealth Bank, NAB and ANZ announced reductions to their headline standard variable home loan rates within hours. Not one of the Big Four passed through the full 25 basis points. The average reduction for owner‑occupier principal‑and‑interest loans was 19 basis points, leaving the effective spread between the RBA cash rate and the standard variable mortgage rate at 283 basis points—33 points wider than the 20‑year average recorded in the RBA’s Statistical Table F6 – Housing Lending Rates.

Australian mortgage borrowers habitually see incomplete pass‑through when rates fall, yet the 2026 pattern differs in scale and persistence. The explanation sits inside the liability side of bank balance sheets, where term deposit wars, elevated swap‑rate spreads and a regulatory environment that rewards retained earnings have structurally lifted the cost of money. This article maps the specific funding channels that prevent full pass‑through in 2026 and sets out the data that borrowers should watch.

The Pass‑Through Mechanism: Central Bank Levers and Commercial Realities

The monetary policy transmission mechanism described in the RBA’s own educational material—The Transmission of Monetary Policy—assumes that a change in the cash rate target flows swiftly to bank funding costs and then into lending rates. In practice, the pass‑through coefficient for the standard variable housing rate averaged 0.70 for the major banks over the five years to December 2025, as reported in the RBA Statement on Monetary Policy (November 2025, Box B). In 2026 that coefficient has slipped below 0.60.

Banks do not fund mortgages from the cash rate. The cash rate anchors the overnight interbank market, but an Australian major bank’s weighted average cost of funds derives from six major sources: at‑call retail deposits, term deposits, short‑term wholesale debt, long‑term covered bonds, RMBS securitisation and retained equity. The RBA’s March 2026 Chart Pack shows that deposits (at‑call plus term) supply 59 per cent of major bank funding, wholesale instruments 28 per cent, and capital the remainder. Each component carries a different sensitivity to the cash rate, and term deposits—the single largest category—have become almost completely insensitive to rapid rate declines.

When the RBA began raising rates in 2022, deposit passthrough was near‑instant on the way up; the Big Four lifted at‑call bonus saver rates within days. On the way down, even at‑call rates have lagged, with the average online saver rate falling only 14 basis points for a 25‑basis‑point cash rate cut, based on APRA’s Monthly Authorised Deposit‑taking Institution Statistics (December 2025). That asymmetry is the first source of incomplete pass‑through.

Deposit Dynamics: The Term Deposit Trap

By January 2026, household term deposits on the balance sheets of the Big Four totalled $1.47 trillion, up from $1.12 trillion at end‑2021, per APRA quarterly ADI property exposure data. The stock of term deposits had been built during the tightening cycle when banks competed aggressively for funds, offering five‑year term deposit rates as high as 5.35 per cent when the cash rate peaked at 4.35 per cent. Many of those deposits still carry guaranteed rates above 4.50 per cent and do not mature until late 2027.

This legacy book creates a floor under marginal funding costs. Even if a bank raises new one‑year term deposits at 3.60 per cent after the February 2026 cash rate cut, its average term deposit cost remains near 4.20 per cent. The RBA’s Statement on Monetary Policy – February 2026 notes that the spread between the effective term deposit rate of the major banks and the cash rate has widened to 35 basis points, double the pre‑2022 average. Until that stock rolls over, the banks have no room to reduce mortgage rates by the same quantum as the cash rate without compressing their net interest margin to levels that would trigger shareholder dissent.

At‑call deposits, historically a cheap and cash‑rate‑sensitive funding source, no longer provide much offset. The Big Four collectively hold $920 billion in transactional and online savings accounts. Bonus saver accounts require conditions such as minimum monthly deposits, and banks have cut the conditional bonus rates more quickly than base rates, but the average effective at‑call rate across the major banks was still 1.95 per cent in February 2026, compared with a cash rate of 3.85 per cent. The gap of 190 basis points is wider than at any point in the decade before the pandemic, meaning that mortgage pricing cannot rely on cheap deposit buffers.

Wholesale Funding and the Swap Rate Spread

Wholesale markets remain the price‑setter at the margin for the Big Four. When a bank writes a three‑year fixed‑rate mortgage, it typically hedges with an interest rate swap priced off the three‑month Bank Bill Swap Rate (BBSW) plus a credit spread. Between January 2022 and February 2026, the spread of three‑month BBSW to the overnight indexed swap (OIS) rate—a measure of interbank credit risk—averaged 22 basis points, compared with 6 basis points across 2019. Even though the cash rate is falling, the BBSW‑OIS spread has remained elevated near 18 basis points in early 2026, as reported in the RBA’s Financial Stability Review (March 2026 data).

Long‑term wholesale issuance is similarly expensive. Major bank five‑year covered bond spreads widened to 70 basis points over semi‑government benchmarks in late 2025 and had only tightened to 65 basis points by late February 2026. In 2019 the equivalent spread was 30 basis points. For an institution issuing $10 billion of covered bonds annually, that incremental 35‑basis‑point cost represents a $35 million annualised burden—funded, ultimately, by higher mortgage rates. The Australian Office of Financial Management’s yield curve data confirm that the semi‑government benchmark itself has stayed above 4.10 per cent throughout early 2026, leaving all‑in wholesale funding costs near 4.75 per cent, above the standard variable mortgage rate after allowing for credit provisions.

Regulatory Influences and Competitive Dynamics

APRA’s unquestionably strong capital framework, anchored to a Common Equity Tier 1 (CET1) ratio target of at least 10.5 per cent for the major banks, compels the Big Four to retain a larger share of profits than they did before the 2017–2019 royal commission. Return on equity has settled in the 10–11 per cent range, down from 14–16 per cent in the early 2010s, which reduces the scope to sacrifice margin for market share. The Australian Competition and Consumer Commission’s Home Loan Price Inquiry report (December 2025, updated February 2026) observed that the major banks exhibit “oligopolistic pricing reinforcement”, with each lender waiting for a rival to move first on out‑of‑cycle cuts. In the first two months of 2026, no major bank announced an unscheduled mortgage rate reduction beyond the RBA‑linked event.

Non‑major lenders—Macquarie Bank, Bendigo and Adelaide Bank, and mutuals—have historically increased competitive tension. In the February 2026 round, Macquarie passed through 22 basis points of the 25‑basis‑point cut, Bendigo passed through 20, but their combined mortgage book is less than 12 per cent of the owner‑occupier market, according to ABS Lending Indicators (January 2026). Their pricing cannot force the majors to follow when their own funding bases are even more weighted toward expensive term deposits and RMBS issuance. The RMBS market, a critical funding channel for non‑banks, saw primary spreads widen by 15 basis points in late 2025 and have not yet retraced.

What 2026 Means for Mortgage Borrowers in Practice

As at 28 February 2026, the average discounted variable rate for an owner‑occupier paying principal and interest at a Big Four bank—taking the four headline offers published by the lenders—was 6.68 per cent. The RBA cash rate was 3.85 per cent, implying a spread of 283 basis points. For a $750,000 loan with 25 years remaining, the February cut reduced monthly repayments by approximately $82, compared with the $109 reduction that a full 25‑basis‑point pass‑through would have delivered. The shortfall of $27 per month per average loan aggregates to roughly $270 million in forgone household disposable income across the Big Four mortgage books over a full year, based on APRA loan‑level data showing 3.32 million owner‑occupier mortgages at the majors.

Borrowers seeking to capture a greater share of rate relief are turning to three‑year fixed rates. The average three‑year fixed rate for a major bank owner‑occupier loan fell 35 basis points in the six weeks following the February cash rate cut, to 5.49 per cent, driven by a rally in the three‑year swap rate to 3.52 per cent. That is now 119 basis points below the average discounted variable rate, a spread so wide that fixed‑rate refinancing enquiries rose 42 per cent in February, according to AFG Broker Pulse data. However, fixed rates carry break‑cost risk, and the forward curve implied by ASX 30‑day interbank futures suggests the market is pricing a further 50 basis points of RBA cuts by December 2026. Breaking a fixed loan midway could crystallise a significant economic cost if floating rates fall further.

Data Points That Will Move the Pass‑Through in 2026

Three indicators will determine whether the Big Four narrow the gap in the second half of 2026. First, the RBA’s Term Funding Facility (TFF) expiry tail: while the bulk of TFF borrowings matured in 2023–2024, a residual $15 billion was refinanced in 2025. Its replacement with market‑rate funding in 2026 has added an estimated 4 basis points to aggregate major bank net interest margins. Second, the 90‑day term deposit special rate: when the major banks’ advertised three‑month specials fall below 3.20 per cent (they stood at 3.55 per cent in February), the marginal deposit cost will align more closely with the cash rate. Third, the spread of three‑month BBSW to OIS: if it narrows below 10 basis points—the RBA’s March Financial Stability Review flagged this as a possibility if global liquidity conditions improve—the wholesale funding headwind abates materially.

The RBA’s own internal research, published as a Research Discussion Paper (RDP 2024‑07, updated in December 2025), estimated that a permanent 15‑basis‑point increase in the spread between the cash rate and the standard variable rate reflects the combination of higher regulatory capital requirements, reduced implicit government guarantees and increased deposit concentration. The paper’s findings remain operative in 2026, suggesting that even if the cash rate falls to 3.00 per cent by year‑end, the average standard variable rate is unlikely to trade below 6.00 per cent.

Conclusion

The incomplete pass‑through of RBA rate cuts by the Big Four in 2026 is not a temporary anomaly. It is the product of a structural layer of deposit costs locked in during the 2022–2023 tightening cycle, wholesale credit spreads that remain 30–35 basis points above pre‑pandemic norms, and an oligopoly that prizes margin durability over market share during an easing cycle. Each of these factors has a measurable, public‑data footprint, from the RBA’s statistical tables to APRA’s monthly banking statistics and the ASX futures strip. Mortgage borrowers who track these indicators will be better positioned to anticipate, rather than simply react to, future repricing decisions. The era of a mechanically tighter link between the cash rate and home loan rates has passed, and the 2026 pattern indicates that even in a cutting cycle, the borrower’s gain will be meaningfully less than the central bank’s headline move.

Information only, not personal financial advice. Consult a licensed mortgage broker.