On Tuesday 2 August the RBA cut official cash rate 25bps to 1.50%, the lowest cash rate in Australian history. However there was a predictable outcry from the tabloid press and talkback radio as Australian banks failed to pass on the full rate cut to their mortgage holders.
What the big four banks did do though was very interesting. As well as only cutting variable mortgage rates by between 10bps and 14bps they increased the rates paid to term deposit holders. CBA was first to move and raised 1, 2 and 3 year deposits by between 50 and 55bps. Westpac followed with increases over the same terms by between 45bps and 55bps. ANZ is said to be scheduling an increase of 60bps in its 31-day notice term deposits and NAB is thought to be increasing 8 month TDs by 85bps.
The move has been cynically seen as a way of offsetting the predictable disenchantment with the lower than 25bps reduction on mortgages. With continuing discussions around a Royal Commission into the banking sector, the banks need to manage perceptions around their behaviour. The optics of the decision to cut mortgage rates and increase term deposit rates certainly look good. Savers, and retirees in particular, have borne the brunt of relentless cuts to interest rates. So giving something back to depositors has a good look to it but the reality of the banks’ munificence may be somewhat different. One analyst said yesterday CBA only has $9 billion of term deposits but $400 billion of housing loans. The result being that they will most likely increase their returns on equity from the changes.
The other side of the coin that doesn’t get much airtime is that banks are in a battle to maintain even greater liquidity levels via the Net Stable Funding Ratio. With new APRA rules set to be implemented by January 2018, banks will rely more and more on increasing their deposit bases. They can’t afford to lose depositors and the latest rate moves could be seen as a defensive move to stop the leakage of term deposits into other yielding products such as hybrid securities or housing. Notwithstanding the reasons for the moves, they are a welcome relief for deposit holders.