Banks To Pass On RBA Rate Cut Banks are expected to pass on in full any cut in the official interest rate on Tuesday to mortgage customers, amid improvements in key funding markets and the scrutiny of an election campaign. With investors betting the Reserve Bank will reduce the cash rate to a record low of 2.5 per cent, official figures highlight an easing in the "war for deposits," a trend blamed by banks for their failure to pass on cuts last year. Analysts say banks will want to avoid making themselves a potential political target during the campaign by holding back rate cuts at a time when their profits are growing strongly. Analysts say Australia's big four banks want to avoid making themselves a target during the federal election. The main reason banks have given for withholding rate cuts in recent years has been the cost of deposits - which has been pushed higher by lenders competing to obtain more of their funding from stable sources. Now the trend is receding, with banks cutting the premium they are prepared to pay depositors. Last September banks were paying 0.9 percentage points above the cash rate for term deposits; this gap has since narrowed to 0.6 percentage points. "The pressure is not as intense as it was say 12 or 18 months ago," the chief executive of online bank ING Direct, Vaughn Richtor, said. Shaw Stockbroking analyst David Spotswood said the cost of raising money on wholesale markets had risen since the last cut in May, which was passed on in full, but this was unlikely to prevent banks from passing on a cut this week. Last time they passed it all on. Wholesale rates have blown out a little since then, but they've been saying their margin outlook is stable," he said. I would be surprised if they did not pass it on, particularly pre-election. Analysts from Deutsche Bank, Goldman Sachs and Morgan Stanley have also flagged the big banks were probably benefiting from reduced competition in the deposit market over the past month. When the RBA cut the cash rate to 2.75 per cent in May, Commonwealth Bank, Westpac and NAB all passed on the full 0.25 percentage point reduction. ANZ cut its rates by 0.27 percentage points, a move it said was driven by falling funding costs. Soon after, the cost of borrowing on global markets rose sharply after US Federal Reserve chairman Ben Bernanke signalled plans to wind back stimulus in June. But a credit market specialist with ADCM Services, Philip Bayley, said wholesale funding costs had fallen during July and were approaching the four-year lows of earlier this year. CBA raised four-year debt at a cost of 85 basis points above the benchmark a few weeks ago, only slightly higher than what NAB paid for similar debt before Dr Bernanke's June comments.