Bank deposit rates go zero bound

Three of the big four banks have cut deposit rates independently of the RBA, with some now nearing zero:

The Reserve Bank of Australia hasn’t reduced the official interest rate since October, but that hasn’t stopped our big banks from quietly cutting the rates they pay customers.

“Although the Reserve Bank has left official interest rates on hold since October, it hasn’t stopped some of our biggest banks slicing interest rates of most the popular savings accounts,” Mozo director Kirsty Lamont said in research note issued to Business Insider Australia.

According to the comparison site’s analysis, NAB has cut its saving rates by 0.11%, Westpac by 0.10% and ANZ by 0.05% this year. Of the big four, only the Commonwealth Bank has relented…

ANZ and CBA customers who make any withdrawals or don’t deposit monthly required amounts, can expect to make all of 0.01% interest on their money. After fees, they’d likely end up in a worse position than where they began. NAB’s base rate meanwhile is a measly 0.11% while Westpac offers no more than 0.45%.

The below chart, which uses aggregate deposit data from the RBA, illustrates the situation:

The problem facing the RBA is that monetary policy becomes ineffective when bank deposit rates hit their lower bound. While the RBA can theoretically cut the cash rate another 0.75%, the banks cannot cut deposit rates much further without compressing their net interest margins (i.e. the spread between deposit and lending rates).

This means that only a fraction of further interest rate cuts will be passed onto end borrowers.

Leith van Onselen
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