Banks have been increasing interest rates, separate to the Reserve Bank of Australia (RBA), due to the rise in the cost of wholesale funds caused by the US sub-prime crisis. This has affected banks all around the world.

A significant part of banks’ funds are sourced through wholesale funding - short-term and long-term funds in both the domestic and global capital markets.

Since August last year, the RBA has increased the cash rate on four occasions by 25 basis points (in total - 100 basis points) and banks have increased interest rates separately by a further 50 basis points.

Interest rate changes made by the RBA and by banks impact on the prices consumers pay for financial services, in particular loans.

David Bell, Chief Executive of the ABA, said: “Recent media reports which suggest that banks are raising the price of fees are incorrect. Over the past few years, fee prices have remained relatively steady.”

Evidence of this is reflected in the RBA’s latest report on fees which noted: 

“For both businesses and households, the growth in fee income appears to have been mainly the result of greater use of banking services, rather than higher unit charges.” ¹

It is important to note that over the past year, banks have reduced or abolished some fees on accounts including some exception fees. Banks also provide assistance to vulnerable customers by providing fee-free and low-fee banking to customers who hold Commonwealth Government Healthcare Cards.

One feature of the current environment is that banks are competing even more aggressively for household deposits. This is expected as wholesale funding becomes more expensive, banks will seek other funding sources.

Competitive interest rates on investment and online accounts are being offered to consumers. Around 70% of customers’ funds are in personal investment accounts. These are savings vehicles and deliver strong rates of interest to customers.

Mr Bell said: “Clearly consumers are seeing value in deposits because banks are seeing an inflow of funds into deposit accounts, despite their tax disadvantage compared to other savings vehicles such as superannuation.”

The CPI figures show that over the 12 months to the end of June 2008, the cost of financial services (excluding insurance) increased by 10.6%.  The overall CPI increased by 4.5%.

The ABA notes that the Australian Bureau of Statistics (ABS) has revised their methodology for measuring price changes for financial services. While there is no doubt prices have increased for financial services, final data will not be available until the ABS completes the methodological changes which are still underway.