Bruce's Blog

Happy New Year

Thu, Jan 19th 2012, 08:23

 

This year is one of opportunity to improve your finances and we will help you.

We will be sending a monthly news email with snippets that will give you some insight into finance and borrowing which we hope you will share with family and friends.

The days before Christmas saw an announcement that could change the way Australians view their home loans. ANZ announced that it would look at its interest rates on the second Friday of each month, effectively severing the connection with the Reserve Bank of Australia's (RBA's) interest rate review on the first Tuesday of each month.

What influences bank borrower rates?

Banks adjust their borrower rates in response to a combination of factors. These factors include competitive considerations such as the individual bank's appetite for new loans and the borrower rates set by their competitors. They also include cost factors such as:

  • movements in the RBA's Overnight Cash Rate;
  • the cost of funding from the wholesale money market in Australia and overseas; and
  • the cost of attracting customer deposits;

Banks operating in Australia have diverse funding bases, with most funding sourced from deposits (approx. 50%) and short-term (20%) and long-term (20%) wholesale debt.

 

Will the banks be able to continue to move in line with future RBA rate movements?

Australian banks source a significant proportion of their wholesale funding from banks in Europe. The Eurozone crisis has meant that banks are having trouble accessing long-term wholesale markets. When they can access them, the prices are historically expensive. While the banks are able to fund their currently modest growth in lending using customer deposits, they still have to refinance existing wholesale funding as it matures. The longer the Eurozone crisis persists the more likely that banks will have to pass on the increased cost of funds to customers, be they borrowers, depositors or shareholders. That will show up as not passing on all of the RBA rate reductions.

In summary, while all lenders have passed on the last 0.25% rate reduction, some lenders are already reducing discounts available on new lending and no doubt will not pass on the next rate reduction in full. However, the outlook for interest rates should still be stable to lower by the end of the year. There are still some excellent discounts on variable rate loans available and even some fixed rate loans at below 6%.

Best wishes for the year ahead.