After BOQ’s Virgin Money failed to pass on the RBA’s rate cut to borrowers, Allaway faced questions at his front door from a reporter on A Current Affair, broadcast by this masthead’s owner, Nine.
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Withholding RBA rate cuts on home loans can also be bad for business. As more borrowers have cottoned onto the need to shop around for their mortgage, banks have lost some of their pricing power, their ability to set prices, rather than have them dictated by competition.
So all up, failing to pass on a full RBA rate cut to mortgage customers may give banks a short-term hit, but it’s not without business risks.
Against this, many analysts say banks are more likely to re-price in the deposit market, which attracts less scrutiny, and which is less likely to result in bank bosses ending up on A Current Affair.
You might think the humble savings account is pretty simple, but the competition watchdog found in a 2023 inquiry that the market for retail deposits is “opaque” and complex, which can make it difficult for consumers to compare products.
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Better rates are typically offered on “bonus” accounts that also require the customer to jump through all sorts of hoops, such as making a minimum deposit every month. So while the advertised rates can look appealing, many people don’t get those because they don’t meet the requisite terms and conditions. The ACCC found that on average, 71 per cent of bonus saver accounts weren’t getting any bonus interest in any given month. In response to the ACCC’s report, Treasurer Jim Chalmers last year said the government would make banks tell customers when the interest rate on their transaction or savings account has changed.
All this complexity makes life harder for customers. But for banks, it can present opportunities to re-price deposits in ways that may not be obvious to a customer.
For example, banks sometimes use changes in the “bonus” rate (that’s paid only if a customer meets certain conditions) to offset changes to the more significant base rate (the one that gets paid, no matter what). This is a tactic that means advertised rates (the bonus and the base rate) still look pretty attractive, even if most people will in fact be getting much less.
A notable change was from Westpac and several of its brands in April, when it slashed the base rate on its bonus savers by 1.2 percentage points, but then increased the bonus rate by the same amount, leaving the headline rate unchanged.
Or, according to Mozo, ME Bank cut the base rate on a savings account by 0.5 per cent, but it added 0.35 percentage points to the bonus rate, so the headline rate fell by just 0.15 percentage points.
To be fair, there have been other examples where some banks have cut some savings rates by less than the RBA, which helps the customer, not the bank. So it is a mixed picture.
But even so, the moves in savings rates are clearly complex and tricky to compare. A cynic might say that’s the whole point.
Mozo spokeswoman Rachel Wastell says there’s a “growing disconnect between the rates banks promote and what customers are actually earning over time, especially if they don’t jump through the monthly hoops or are unaware of when intro periods end”.
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“In the current rate-cutting cycle, these kinds of shifts muddy the waters for savers trying to compare options and they also mask how much of the Reserve Bank’s monetary policy is really making its way through to households,” she says.
Investment bank analysts are also keeping a close eye on the major banks’ deposit moves following RBA rate cuts, because it can be an important influence on the banks’ profits.
As Morgan Stanley analyst Richard Wiles told a recent media briefing, in the past, banks often used their oligopoly pricing power in the mortgage market to support returns. This was the playbook used by banks between 2009 and 2020, he said. Now, however, things have changed. “I think we’re now in a new era. I think deposit pricing is now the way that banks are looking to manage returns and margins,” Wiles said.
Ross Gittins is on leave.