The Libor rate you quoted is the sterling interbank rate and yes our banks can and do borrow at that rate. However mortgages are in Aussie dollars so the banks need to convert the sterling to Aussie dollars which they do via cross currency swaps which also removes the exchange rate risk. This brings the cost of the Aussie funds back to Aussie BBSW which is about 4.6%. Some of the borrowing say 50% is long term currently 200 bps say over BBSW, so current cost of funds is about 5.6%. Banks then need to cover operating costs, bad debts, capital costs and make a profit. So all the talk of 4% mortgages at the current RBA cash rate only demonstrates a lack of understanding of how banks work.
If the RBA cuts 25 bps, the banks will probably only pass on 5 or 10 bps
