Key Points
- The RBA has hiked the official cash rate for the 11th time in a year.
- While it's bad news for mortgage holders, experts say competitive rates are available.
- Savers can benefit from the rising cash rate, but need to check they're getting the best deal.
On Tuesday, the Reserve Bank of Australia (RBA) since it started hiking rates in May 2022.
The central bank lifted the official overnight cash rate by a quarter of a per cent to 3.85 per cent, with the cash rate now the highest it has been in more than ten years, rising from a record low of 0.1 per cent in April 2022 over the past year.
Banks are not obligated to pass on the RBA's rate hikes or cuts to their customers, but they do generally follow suit. Here's why, and what it means for both borrowers and savers.
How does the cash rate affect mortgage rates?
From 1 May 2022 to 1 May 2023, the big four banks' (Commonwealth, Westpac, NAB and ANZ) lowest basic variable rates for new owner-occupiers rose from an average of 2.16 per cent to an average of 5.48 per cent as the RBA increased the cash rate.
The cash rate is "the rate that banks are paid for leaving money with each other, or with the Reserve Bank, overnight," explained economist Peter Martin, a visiting fellow at the Crawford School of Public Policy at the Australian National University.
"So if that increases, you could imagine that if you needed to borrow money overnight, instead of being charged 1 per cent, you're charged 2 per cent, you can see how you'd have to pass that on to someone you’d lent money to. So the RBA adjusts [the overnight cash rate], and the banks tend to follow [by raising mortgage interest rates]."
On Wednesday, NAB became the first of the big four banks to respond to the RBA's rate hike, passing on the full 0.25 percentage point increase to both savers and borrowers with variable home loans from 12 May.
Banks' interest and deposit rates are determined by "a huge range of different factors", including the cash rate, financial comparison site RateCity's director of research Sally Tindall said.
Source: SBS News
Following the RBA's emergency meeting at the beginning of the COVID-19 pandemic in March 2020, three of the big four banks did not pass on the 0.25 per cent cut to customers, while ANZ passed on a partial cut. In November 2020, the RBA made what was termed a "micro-cut", reducing the cash rate to 0.1 per cent, which the big four banks all failed to pass on to variable home loan customers, instead opting to cut fixed rates.
"These are examples of the fact that banks aren't obligated to dance to the beat of the RBA's drum," Ms Tindall said.
Banks also sometimes offer discounted variable rates to new customers in order to "make those rates more attractive to people looking to refinance, or new customers coming into the market," she explained. However, over the past year, "we have seen all four big banks pass on each rate hike, up to the last 10, in full to their variable existing customers. We've also seen them pass these hikes on to new customer rates".
How can mortgage holders get a better deal?
Australia's big four banks hold the vast majority of mortgages in Australia, and tend to move their rates in what has previously been described by the Australian Competition and Consumer Commission (ACCC) as a "synchronised" manner.
"Because we've only got four big banks, and for some reason people liked borrowing and depositing with big banks rather than the small ones, they tend to move together," Mr Martin said.
Consumers do have other options to choose from, though. According Rate City data, there are 115 active lenders in Australia, or 91 when combining the big four banks with their subsidiaries.
Despite the cash rate hikes, borrowers can still find competitive deals, Mr Martin said, as mortgages are "worth a lot to banks" due to being "regarded as safe" when compared to other types of loans.
"As a result, they're competing quite a lot. And certainly if you go to a bank and say 'I'm thinking of ', you'll suddenly find them very cooperative," he said.
"So the odd thing is, is that although they're all increasing rates in unison, they're competing by reaching out only to those customers who are likely to switch."
Good news for savers, but beware of 'frustratingly small rates'
While cash rate rises hit mortgage holders hard, they can be good news for savers.
While banks have previously tended to "delay increasing deposit rates when rates are going up" in order to increase their profits, despite quickly increasing mortgage rates, that is starting to change, Mr Martin said.
"The good news is that they've started behaving better on their deposits," he said.
The ACCC is also currently holding an inquiry into banks' practices around deposits made by retail customers, including looking at "the rates of interest paid on amounts deposited or held in retail deposit products", with a final report due to be handed to Treasurer Jim Chalmers in December.
Banks have improved over the past few years when it comes to increasing savings rates, thanks to "pressure from their customers, pressure from their competitors, and from the government" as well as the rising cost of wholesale funding, Ms Tindall said.
"You can see that a number of banks have got reasonably competitive rates on the table to attract new business."
Consumers should beware of savings accounts that still offer "frustratingly small rates", she said.
"Three of the big four banks have hiked their gold saver accounts to over 4 per cent at this point in time, that's for new and existing customers if you meet the monthly terms and conditions, which actually aren't too onerous."
"That said, on their online saver accounts, they've got a reasonably high introductory rate that lasts from anywhere between three and five months, only for those rates to fall away to as low as 1.1 cent in the case of Westpac and ANZ. That's really catching out existing complacent savers who haven't done a health check on their rate recently."
