Some of Australia’s biggest banks made headlines this week when they confirmed they would cut some interest rates.
However, the rate cuts were not universally applied, affecting term deposits at some banks and home loans at others, and came days after the Reserve Bank of Australia reiterated that it was in no hurry to cut interest rates for the time being. It was done later.
So why are banks cutting interest rates when the RBA isn’t? What does that mean for households?
Let’s unpack it.
Which banks have lowered their interest rates?
Banks don’t necessarily shout interest rate changes publicly from the rooftops. So we asked RateCity.com.au to crunch the numbers on term deposits and home loans. (We’ll get back to the topic of mortgages in a moment.)
Since early August, 23 banks, including Commonwealth Bank, NAB and ANZ, have cut interest rates on at least one term deposit.
CBA was the first major bank to cut interest rates on almost all term deposits by 0.5 percentage points a week ago, NAB cut by the same amount this week and ANZ cut interest rates by up to 0.8 percentage points. .
But Rate City’s Lane Gordon says the cut in term deposit rates is not surprising.
“Term deposits have gradually declined on a 12-month deposit basis from their peak in July last year,” he told the ABC.
That said, 15 banks have increased interest rates on at least one term deposit since August 1, according to Rate City analysis.
“Most of the changes to fixed deposits have been reductions, but a number of banks, including ANZ and NAB, have increased interest rates,” Mr Gordon said.
“(They) increased the maximum interest rate to 4.8% to accommodate the CBA maximum. (Meanwhile) the CBA also increased some products.”
Overall, 27 banks have changed at least one term deposit rate since early August, with some banks both raising and lowering their rates.
The catch, however, is that all of these changes are aimed at new customers, so if you currently have some cash in your term deposit, you won’t be affected by the reduction (or increase).
Banks offer higher interest rates to savers. (AAP: Bianca De Marchi)
Have any banks lowered their mortgage interest rates?
Yes, but it is not as popular as term deposits. Also, only new mortgage customers are eligible.
Since the beginning of August, only 11 companies have lowered their fixed interest rates, while five have lowered their variable rates, according to Rate City analysis. (Some lenders do both for different products.)
Westpac on Wednesday cut some of its fixed rate packages with terms of two to five years to 5.89% for people with at least 30% deposits.
Commonwealth Bank profits fall to $9.5 billion
On Friday, CBA announced reductions in both fixed and variable mortgage rates.
Australia’s biggest lender has slashed fixed loans by up to 0.7 percentage points and some variable interest rates by up to 0.35 percentage points.
Mr Gordon said the change to fixed rates was part of a “wider adjustment” and that interest rates, like term deposits, were slowly falling over time.
However, NAB was the first of the big four banks to lower fixed and variable interest rates on home loans.
After lowering some variable interest rates in April, it lowered three-year fixed rate loans in July.
Why do banks reduce some interest rates but not others?
From the bank’s perspective, it claims to constantly review interest rates and adjust as necessary to manage costs in line with customer needs.
But broadly speaking, it has to do with what central banks around the world are expected to do on interest rates, which in turn affects our banks.
Sherrell Murphy, chief economist at EY, said this was an indication of the direction of the global economy, which would have implications for financial markets.
“The US central bank is expected to start cutting interest rates, and the market is pricing that in,” she explains.
“What this means is that interest rates are falling for banks that raise funds in a variety of ways, including here in Australia and in wholesale funding markets around the world.
“So they are pricing their retail customers according to those rates.”
Cherrell Murphy says banks are getting ahead of central bank interest rate cuts. (ABC News: Daniel Irvin)
In other words, even though the RBA hasn’t cut the cash rate, the interest rates banks are being charged have fallen and they are passing on the lower interest rates to new customers.
“Banks are getting in front of this and are gradually lowering rates,” says Layne Gordon of Rate City.
“No one knows when the cash rate will fall, but banks don’t want to pay too much interest on deposits that ultimately hurts their profit margins.”
“There’s no need to get too excited” about the rate change, said Brian Johnson, a bank analyst at MST.
“We shouldn’t get too excited about all this. Until[the RBA]cuts rates, it’s kind of a Goldilocks scenario at the moment,” he said.
“It’s good for banks not to cut rates at this point. Cutting rates would be bad for (banks).”
Banks such as Westpac are adjusting interest rates ahead of the RBA’s official rate cut. (ABC News: Kiana Norton)
Will these interest rate cuts affect me?
This does not apply when taking out a new fixed deposit or mortgage loan.
But banking analyst Brian Johnson says there’s no need to worry too much about interest rate cuts, even if you’re in the market to buy new term deposits to boost your savings.
“The reality is that most Australian bank funding comes from deposits, about 60 per cent of it,” he explains.
“What we know at the moment is that large-scale funding costs will fall, and fixed deposits will replace them, so term deposit rates will also fall.
“It doesn’t really matter how important it is, because what really matters is the ‘at-call’ special deposit rate.”
Brian Johnson said the bank’s recent rate cuts were not worth getting “too excited about”. (ABC News: Dan Irvine)
An “at-call” or “call” deposit rate refers to an account that earns interest while remaining accessible to the customer, Johnson explains.
“So Macquarie is currently offering a call rate of 5.35 per cent and CommBank is offering a call rate of 5.1 per cent,” he says.
RBA Board keeps interest rates at 4.35%
“I think the real danger is that we are overestimating the potential savings that will flow from these (term deposit) rates because call rates are still incredibly high.
“It generates a lot of headlines, but it doesn’t mean much.”
EY’s Sherrell Murphy agrees that recent headlines about rate cuts are “a bit exaggerated.”
“The reality is that things change for marginal consumers who are taking out new loans or making new deposits,” she says.
“But most people don’t see it, feel it or know anything about it.”
When do banks think the RBA will cut rates?
Hidden dangers in our economic discussions
Although the central bank has ruled out a rate cut this year, the big four banks are less confident.
Both Commonwealth Bank and Westpac expect the RBA to start cutting the cash rate later this year, with cuts potentially starting in November.
Economists at ANZ say the first round of rate cuts is likely to occur around February 2025, while NAB believes the central bank will hold off on cutting rates until May 2025.
But one thing the big four banks can agree on is that the RBA will not raise rates any further. They all argue that the current level of 4.35% is the peak, despite messages from the central bank that it will not hesitate to raise rates if: Necessary to control inflation.
That said, we will have a better idea of what the RBA is thinking when it next meets in late September.
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