Over the weekend, Westpac warned that it is still facing high deposit funding costs, which are offsetting the recent fall in term wholesale funding costs and could preclude it from passing on future official interest rate cuts to borrowers. From the Herald-Sun:
WESTPAC says it is still paying too much for funding – the strongest indication yet that it will not cut home-loan rates out of cycle with the Reserve Bank.
The lender says its funding costs remain “elevated” because of strong competition for deposits.
Costs are still high despite a slide over recent months in the amount Australian banks pay to borrow funds in international money markets, the bank says.
There has been some market speculation the banks could start to cut interest rates soon without waiting for the Reserve Bank to act.
“Despite the fact that the cost of wholesale funding has eased somewhat in recent months, our overall cost of funds remains elevated due to the competitive pressures for customer deposits,” Westpac spokesman Paul Marriage told Bloomberg.
“This is unlikely to change.”
A quick examination of the RBA Statistics supports Westpac’s contention that deposit funding costs have indeed risen relative to the official cash rate. The below chart shows the spread between the various deposit maturities and the official cash rate on a 3-month moving average (3MMA) basis:
According to the RBA, overall deposit costs have been on the rise since late-2011 and hit an all-time high of 0.45% above the cash rate in December 2012.
The situation is similar when deposit costs are compared against discount variable mortgage rates. According to the RBA, the spread between the discount variable mortgage rate and the average deposit rate has been falling since late-2011, suggesting that the banks’ deposit funding costs have risen:
Basically, the banks have a point…
