This is my last post on interest rates for a while, I promise. But I couldn’t let yesterday’s decision by the big four banks to follow the RBA and pass on the full 25 basis point cut in full go unnoticed.
But that’s not the story. The story is ANZ’s decision to now announce its standard variable interest rate on a set date, independent of the Reserve.
The RBA sets its monetary policy (interest rate decision) on the first Tuesday of every month (except January when it takes a break), but from now on ANZ, will make its own rate decision on the second Friday of every month.
For so long, we’ve been accustomed to thinking that mortgage rates are directly linked to the RBA’s decision, and for a long time, that was mostly true. But the European debt crisis has changed that somewhat.
Let me explain this as simply as possibly. Banks fund the loans that consumers take a number of ways, but the two main ways are through deposits which you and I make at the bank, and through the wholesale credit markets, predominately overseas. The latter, has no major link to the RBA.
Here’s the problem. While deposit rates, which are linked to the RBA are falling because of the Reserve’s rate cut, wholesale funding costs are rising, and quite hard. One is going up, the other down.
So it’s all about what kind of mix the bank has of these two funding measurers.
The next factor, is that Australians have been saving money at the highest rate in 30 years. In other words, the banks have more deposits to source loans from, than when they did three decades ago. In fact, deposit rates have surged since the start of the global financial crisis.
So it’s a complicated equation for borrowers to understand.
For everyone to really be happy, what we’d want to know is what’s the margin the banks are making on their loans compared to what they’re paying for these overseas funds they’re tapping into, but of course, that flies in the face of basic business principles.
Paul Dowling from East & Partners told me on SBS World News Australia yesterday that he thinks the ANZ move is good, because it adds transparency to the decision making process when it comes to setting interest rates.
However, he still believes that the RBA’s decision is a good guide to knowing whether ANZ will cut or lift interest rates. Further, he says the banks do have scope to cut rates in full, given a lot of their funding now comes from domestic deposits. It just depends how much they’re tapping from overseas, and what rate they’re paying.
At the end of the day, banks are businesses. They exist to make a profit for their shareholders, but at the same time, have an ethical obligation to the community, especially when billion dollar record profits are being made.