Regulators home in on banks’ skinny deposit rate rises

Financial regulators will closely watch how much of the rise in interest rates banks pass on to household savings accounts, having so far lifted rates on home loans by far more than on deposits.

Amid signs of a slowdown in the housing market, the Council of Financial Regulators is also keeping a keen eye on how consumers are affected by higher mortgage repayments and their lower capacity to borrow due to the rising interest costs.

The Council of Financial Regulators said there had been “much less pass-through to deposit interest rates than to lending interest rates so far”.Credit: Josh Robenstone

The council is made up of the country’s main financial regulators: the Reserve Bank, the Australian Prudential Regulation Authority, the Australian Securities and Investments Commission and the federal Treasury.

Banks have passed on this month’s 0.5 percentage point increase in the official cash rate to mortgage customers in full, after also fully passing on last month’s 0.25 percentage point rise.

But this month’s changes in savings rates for at-call accounts - accounts where cash can be withdrawn at any time - have been far more patchy so far, even though some term deposits have lifted significantly.

Commonwealth Bank increased bonus rates on a key savings account and a youth savings product by 0.5 percentage points. National Australia Bank raised its base rate on its online saver by 0.25 percentage points to 0.3 per cent, bringing it into line with CBA for this type of product. NAB also lifted an introductory rate, which is only open to new customers, by 0.5 percentage points.

ANZ Bank and Westpac have not yet moved savings account rates this month, but Westpac is expected to announce deposit rate rises on Friday.

Market analysts have predicted bank profit margins will start to widen this year as lenders lift mortgage rates more sharply than deposit rates, and the Council of Financial Regulators noted the trend at its quarterly meeting this week.

“Participants noted that, given the cash rate remains at a low level, there has been much less pass-through to deposit interest rates than to lending interest rates so far. It was agreed to continue to monitor pass-through closely,” the Council said in a statement on Thursday.

Former prime minister Scott Morrison during last month’s election campaign urged banks to raise deposit rates, but generally, there is less public scrutiny of deposit rates than mortgage rates.

Importantly, banks have increased term deposit rates more sharply, which should help savers such as retirees. Even so, the lack of movement in at-call savings accounts is a sign of the large deposit balances banks are holding, which means there is less pressure to compete for funds.

Steve Mickenbecker, group executive for financial services at Canstar, said increases in deposit rates had been “patchy,” with some banks moving bonus rates or introductory rates rather than the base rates that all customers receive.

“They are not having to work very hard on the deposit front at the moment because they amassed these huge deposits back during COVID,” Mickenbecker said.

Even so, Mickenbecker said that in previous cycles of interest rate rises, deposit interest rates had ultimately lifted more steeply than rates on loans. He expected banks would need to compete more aggressively to attract deposits in six to 12 months, as wholesale funding costs increased.

“There’s still reasonable hope that eventually, savings increases will start to outstrip home loans,” Mickenbecker said.

The council also said regulators were thinking about how rising interest rates could affect households facing higher mortgage repayments and lower borrowing capacity. It said the housing market appeared to have weakened in major cities, and mortgage lending was starting to slow.

“The council will be closely monitoring the effects of rising interest rates on the household sector,” it said.

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