A media statement from the Australia Institute and media reports claimed that savers were being cheated by banks.

Steven Münchenberg, Chief Executive of the ABA, said: “Nothing could be further from the truth. The Reserve Bank notes that banks are competing intensely to attract depositors. Banks increased interest rates on a range of deposit accounts after the Reserve Bank increased the cash rate on Tuesday. Interest rates over 7% are being offered for some term deposits which means some are now 3% higher than the cash rate.”

The facts on term deposits are:

• When the Reserve Bank of Australia (RBA) decreased the cash rate by 425 basis points over the period September 2008 to April 2009, the average interest rate on term deposits fell by only 235 basis points.  That is, customers were better off by nearly 2% on their deposits as banks did not pass on to customers the full extent of the decreases in interest rates. 
• More recently, banks have passed on 90 basis points of the 100 basis point increase in the cash rate to term deposit rates, from October 2009 to March 2010. 
• Even when the cash rate did not change, over the five months from April 2009 to September 2009, banks increased term deposit rates, on average, by 35 basis points.

Overall savers have benefitted greatly from the fierce competition for deposits.

Since the global financial crisis started, banks have faced continual pressure on their cost of funds. The three sources of funding: deposits, short-term funding, and long-term funding have all contributed to this cost pressure.

The RBA recently stated in its Financial Stability Review:

“Also reflecting a focus on what is perceived to be a more stable source of funds, banks have continued to compete vigorously for deposits by offering higher interest rates, particularly on term deposits. ‘Special’ term deposit rates offered by the major banks are now 180 basis points above the three-month bank bill rate, compared with a spread of around 75 basis points at the end of December 2008, and typically negative spreads prior to the crisis.”¹

The Australian Institute refers in its media statement to savings accounts. If the organisation means at call accounts, then typically these accounts have lower rates of interest compared to the investment type accounts such as term deposits and online accounts which attract higher rates.

Mr Münchenberg said bank customers have a good understanding where to deposit their money if they want to save and receive the benefit of higher interest rates.

Mr Münchenberg said: “Around 70% of customers’ funds are in personal investment accounts. These are savings vehicles and deliver strong rates of interest to customers. Around 30% of customers’ funds are in transaction accounts which are for everyday banking needs such as paying bills or making purchases. These are not saving vehicles and traditionally have not offered high interest rates.”

“It is important to remember that some transaction accounts in the marketplace are fee-free for eligible customers and many are low fee. So it’s important to shop around to find an account that suits your financial goals,” he said.