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Why Why Bank Interest rates are not inline with RBAs

Discussion in 'Real Estate' started by glennt, 18th Oct, 2009.

  1. glennt

    glennt Member

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    Why Bank Interest rates are not inline with RBAs

    For those who are interested?
    I posted a question on the RBAs web site about why Bank interest rates were not inline with the RBAs.. reply I got impressed me so I thought I'd share it. (I need to complete an Economics degree to understand this!!)

    Dear Mr Thomas

    Thank you for your email.
    Many people are concerned that the interest rate on home loans has not
    fallen in recent times by the same amount as the cash rate. The
    perception seems to be that these two interest rates should always move
    together. This was the usual state of affairs over much of the past
    decade, but over a longer period of history this has not been the case.
    Nor is it the case in most other countries.
    The cash rate is the interest rate on short-term funds in the money
    market. Banks source only a small part of their funds in this market.
    They also raise money in longer-term capital markets, including
    overseas, and from deposits. Banks take into account the cost of money
    in all these markets in working out what to charge on housing loans.
    Over the past decade, because credit markets were very stable, the cost
    of raising money in all these different markets tended to move
    similarly. The cash rate was therefore a good indicator of what was
    happening to the overall cost of funds to banks, and this is why an
    unusually tight relationship developed between the cash rate and housing
    loan rates.
    The financial turmoil over the past couple of years has changed all
    this. In some markets, banks have had to pay a substantial premium to
    raise money. This has remained the case even after the government
    offered to guarantee the money they raised. As a result, the overall
    cost of funds to banks has not fallen as much as the cash rate. This
    means that if they cut loan rates in lock-step with the cash rate, their
    financial strength would suffer, which would ultimately make it harder
    for them to continue lending, as has occurred in some overseas
    countries. It is in the community's interest to have a banking system
    that is both competitive and stable.
    Even though it may be of little consolation to you, I would note that
    the cuts in official interest rates in Australia have been translated
    more effectively to lower interest rates on loans than in other
    comparable countries. Since September last year, the RBA reduced the
    cash rate by 4.25 per cent, and mortgage rates fell by 3.85 per cent.
    In the US, in contrast, while the Fed has cut the cash rate by 5 per
    cent since the crisis began, mortgage rates have fallen only by between
    0.5 per cent and 1.5 per cent.
    Some people ask what is the point of the RBA cutting the cash rate if
    the banks don't pass it on fully to home loan rates. Part of the answer
    is that cuts to the cash rate do reduce banks' cost of funds relative to
    what would otherwise be the case, and hence, over time, will mean that
    home loan rates are lower than they would otherwise be. In addition, it
    is important to remember that the housing loan market is only one of
    many channels through which monetary policy affects the economy; the
    effects of monetary policy are very broad ranging.
    You also ask why the government or the RBA does not regulate the
    interest rates that banks charge their customers. We used to do that
    thirty years ago, but the result was that it ended up limiting the
    amount of funds banks had available to lend. This made it difficult for
    many households to get sufficient funds from their bank to buy a house.
    I would also note that, during this period of regulated home loan rates,
    the level of these rates was higher than now, often significantly so.
    I hope this information helps with your enquiry.

    Sincerely

    Kelly
     
    Last edited by a moderator: 19th Oct, 2009
  2. Chris C

    Chris C Well-Known Member

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    It is a good article, but I think people can actually be forward looking about what the article is proposing, being that banks interest rates ultimately come back to their costs, as in banks need to make money too, and if they can't make money with their rates at 6% then will raise them to 7%.

    So with this in mind I think bank rates may well end up being subject to further costs (and reduced revenues) going forward if their required to hold greater levels of capital in addition to higher (though more accurate) risk premiums being placed on loans. These two things both hurt the bottom line of banks and no doubt these costs will be passed onto us.
     
  3. Billv

    Billv Getting there

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    Kelly

    The conveniently didn't tell you that in the US the loans are fixed and they were low to start with,
    so 5 & 6% interest rates which the Americans pay long term is less than what we pay here with a record low cash rate.

    The cost of money is an old excuse and I'm surpriced that they still use it.

    I'm dissapointed that this government which was supposed to be favouring the little guy has done nothing to control the corporate greed
    which has spread into all sectors of our economy and is currently favouring the few big banks operating in our banking system.

    It's good to have a healthy banking system and this is probably the reason the government has turned a blind eye to the profiteering that's taking place
    but something needs to change because we get bugger all customer service, we get no interest for our savings, we get hit with fees to access our money
    and we get charged high interest on both our credit cards and loans.

    The competition in the banking sector is non existent and as we can see with Bankwest, and StGeorge any new players threatening the status quo are quickly taken over by the big 4.

    In summary the banks are ripping us off.......:eek:
     
  4. glennt

    glennt Member

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    I could not agree with you MORE...
     
  5. davo6253

    davo6253 Well-Known Member

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    Don't mind them raising the home loan rates, just quietly im loving 5.5% for at call and around 7% for TD!
     
  6. Billv

    Billv Getting there

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    Money in the bank right now is probably wasted.

    Lets see.... $100 invested for a year (on call) will give us a 5.5% return
    or $5.50 which lets say is taxed at 38% i.e minus $2.00 we are left with $3.50
    which is a little more than inflation.

    We haven't gone backwards but we are not getting rich either
     
  7. davo6253

    davo6253 Well-Known Member

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    So in the same respect you are only paying 3-4% above inflation? Doesnt seem like that bad a deal? Given what service you are provided.
     
  8. Billv

    Billv Getting there

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    What service?
    I wouldn't be complaining if they actually paid interest on the money they are lending me or if they made a fair profit.

    But often enough they are paying no interest to anyone because that money is in between transactions or from cheques which they conveniently take too long to clear or is from non interest bearing accounts which are also hit with the usual monthly fee.

    No problem, let them make as much money as they like.

    I bet the fat cats at the top are thinkng along these lines.
    How can we justify our big pay and also get an extra big bonus this year?
    Why should the standard variable rate be only 3% above the cash rate when we can increase it and make another couple of billion $ profit?
    Ok lets make it 4 or 5%, after all we have control of the market, and who can stop us?

    We are already doing this in business lending anyway and none complains........
     
  9. davo6253

    davo6253 Well-Known Member

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    The service of lending you money that you would not have otherwise?

    Cheques are unavailable but do earn interest.

    Businesses making profit and wanting more ? Welcome to capitalism, I mean you invest to increase your wealth for the same reasons.

    The increase in margins is due to increased funding costs, because the cheap (unrealistic) funding recieved in the last while has finished and as a result these increased pressures are taken on customers, same as any other business. I mean if something meant that investment properties would cost double to maintain who would foot the bill?

    I mean the non-bank lenders have dissapeared due to the same funding pressures, surely that is evidence enough that things have changed