Australian Bankers' Association Inc.

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Funding costs and interest rates

Sydney, 3 December, 2012: The Reserve Bank Board tomorrow may cut the cash rate but that does not mean the Reserve Bank expects banks to follow.

Steven Münchenberg, Chief Executive of the Australian Bankers’ Association (ABA), said: “There’s always speculation regarding individual banks’ pricing decisions on loans and deposits at this time.”

“The ABA is not involved in pricing decisions on loans and deposits. Banks make their individual pricing decisions based on a range of factors.”

“However, the ABA is always asked to comment on funding costs across the industry because it is one of the factors which influence banks’ pricing decisions.”

In the recent Statement on Monetary Policy, the Reserve Bank noted:

“Bank funding costs – relative to the cash rate – have risen by about 50 basis points over the past year,…..

The rise in bank funding costs relative to the cash rate over the past year largely reflects the increased cost of deposits.”

Mr Münchenberg said: “The Reserve Bank cash rate has reduced 150 basis points since November last year, but with banks, credit unions and building societies facing real funding cost pressures, not all of that has been passed on. The Reserve Bank calculates that the major banks have cut standard variable home loan rates by an average of 115 basis points.”

“For small business lending backed by residential security, banks have passed on more of the cash rate cuts, reducing the average loan by up to 120 basis points.”

“While the Reserve Bank has identified that average funding costs have increased by 50 basis points, banks have only passed on 30 – 35 basis points to most home and small business borrowers.”

“At the same time, banks have only passed on about half the cash rate cuts to savers with term deposits.”

“The Reserve Bank understands the cash rate is just one component of the true cost of banks’ funding and therefore does not expect banks and other lenders to exactly match every cash rate movement.”

“The Reserve Bank Board takes into account what borrowers are actually paying in the marketplace for loans and what they are receiving on deposits when making their decision.”

“Banks are facing higher funding costs mainly due to the competitive rates being paid on deposits.”

“Prior to the GFC, term deposits were priced on average 200 basis points below the cash rate. Now, they are 20 basis points above the cash rate.”

“While interest rates on deposits remain attractive and competitive for savers, when combined with the cost of wholesale funding, deposits continue to put pressure on the overall cost of funds for banks.”

“My advice to customers when it comes to home loans, shop around because there is a very competitive mortgage market in Australia – banks routinely offer discounts of around 70 basis points off the advertised standard variable rate to approved customers.”

For further information: 

Heather Wellard, ABA PR,

Phone: 02 8298 0411

Mobile: 0409 830 439 



 1 Reserve Bank of Australia Statement on Monetary Policy, 9 November, 2012. Web link:


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