Reserve Bank shoots down big four’s deposit justification
The Australian 12:00am August 6, 2016
David Uren
The Reserve Bank has flatly rejected claims by the big four banks that their decision to withhold half the 25-basis-point cash rate cut from mortgage and business borrowers this week was offset by lifting the rates being paid to ¬depositors.
Although the major banks heavily promoted the fact that they were lifting rates for term deposits of between one and three years to about 3 per cent, the Reserve Bank said these deposits accounted for less than 2 per cent of their total funding.
The Reserve Bank’s quarterly economic review, released yesterday, said although there had been some increase in bank funding costs this year, the analysis indicated it fell far short of the 10 to 15 basis points that the banks have retained from this week’s 25-basis-point rate cut.
Market economists expect the Reserve will be forced to cut its benchmark cash rate further, possibly as low as 1 per cent, to ensure the benefit gets through to borrowers, with the bank’s new forecasts showing inflation will remain below its 2 per cent to 3 per cent target range to the end of 2018.
“We continue to see a clear risk of further rate cuts, given that the RBA still expects underlying inflation to stay low for an extended period,” the ANZ’s head of Australian economics, Felicity Emmett, said. “In our view, there is a higher risk of further cuts, given that banks have only passed on part of the rate cut to borrowers.”
Although the Reserve Bank has cut its cash rate by 50 basis points since the middle of last year, rate increases by the commercial banks last year and the holding back of half this week’s rate cut means the standard variable rate for an owner-occupier is only about 20 basis points lower, while there has been no decrease at all for personal loans.
When the Reserve cut its cash rate on Tuesday, the commercial bank claimed they were rewarding savers.
Commonwealth Bank’s head of retail banking Matt Comyn said: “Today we’ve reduced our mortgage rates to a record low while increasing term deposit rates to provide an opportunity to the millions of Australians who rely on savings.”
The Reserve Bank acknowledged new regulatory requirements were encouraging the banks to raise more of their funds from deposits and there had been “some upward pressure” on the cost of term deposits.
Wholesale funding costs had also risen, but the Reserve Bank said the banks had been raising fresh short and long-term debt at lower rates than the debt it was ¬replacing.
The banks had raised $90 billion in new debt at record low interest rates since the beginning of the year, and repaid $69bn.
“Estimates of the major banks’ average debt funding costs declined following the May cash rate reduction, but by a little less than the cash rate,” the RBA said.
It did not give a firm estimate, but its analysis suggests bank costs have risen by no more than about five basis points.
The Reserve believes faster economic growth is needed to lift inflation back into its target zone. Its central forecast is that growth will average a healthy 3 per cent through to 2018, when it will lift to 3.5 per cent.
However, JPMorgan chief economist Sally Auld said the ¬Reserve had emphasised many uncertainties about this outlook.
“Any slippage on the growth front can’t be tolerated, given the risks it presents to an already subdued inflation outlook,” she said.
“We expect the RBA will be back to ease in the first half of 2017 by a further 50bp as the inflation undershoot shows signs of persisting for longer than forecast.”