Why the banks can do what they like and ignore the RBA when it comes to cutting deposit rates

Banks just don’t need savers like they used to thanks to more than $200bn in government funding from the height of Covid-19 underpinning their ability to cut deposit rates.

Reserve Bank governor Michele Bullock has all but ruled out rate cuts this calendar year. Picture: Martin Ollman

It’s said that nobody rings a bell at the top of the cycle, but the big banks’ move to cut deposit rates comes pretty close. So it’s time to lock in bank deposit rates.

That’s not because it’s a certainty that the official RBA rate is due to fall soon in Australia; the big banks are cutting deposit rates already because first, they can. And second, because global rates will ultimately support the shift.

At first glance, some early snips from deposit rates from the banks might suggest the big four are playing an old game of moving ahead of the RBA.

But that would suggest that if the RBA left rates unchanged, say for six months, then bank deposit rates might reverse course and go back up.

That’s not going to happen, since banks are dining out on a free lunch handed to them by the government during the Covid-19 emergency.

During the pandemic the RBA pumped liquidity into the banking system and the banks made hay from the so-called “quantitative easing” program which allowed them to artificially lower rates.

Now, years later, about $220bn of that money from that emergency funding is still washing through the banking system and it has enabled big banks to cut deposit rates from a range of near 5 per cent to near 4.5 per cent without worrying about a decline in depositor funds if people move their money elsewhere.

Financial educator and Melbourne Business School Associate Professor Sam Wylie calls it a “Covid hangover” and, as he explains, “the banks don’t need your money as much as they did pre-Covid”.

In fact, although investors – especially older Australians – have been relieved by the normalisation of deposit rates close to current levels, today’s rates are actually meaner than pre-Covid rates. If you look at the gap between the official rate and at-call deposits, the gap has narrowed dramatically over the past few years

“The Covid hangover in the banking system will take many years to unwind and depositors will suffer until it does,” Wylie says.

So no wonder banks are jumping ahead of the RBA and putting through deposit rate cuts which might not be justified by official cuts until next year.

This begs the question: when will the RBA’s rate fall?

RBA governor Michele Bullock all but ruled out any this calendar year when she said it was “premature to be thinking about rate cuts”.

But positions held by traders in the money markets indicate they believe there is an 80 per cent chance of a rate cut this year.

As AMP economist Diana Mousina says on the latest Money Puzzle podcast: “The banks have no clue what the RBA will do next, they are watching global interest rate movements.”

Investors have to make their own decisions.

With mixed views on rate trends, very wealthy investors are holding cash in short-duration bank products.

But for most retail investors the reality is that term deposit rates on offer now across the banking system appear set to slide further.

“Term deposits are on the move and not in a positive direction for savers looking to lock up their cash,’ rate comparison group Canstar says.

And as federal Treasurer Jim Chalmers says, it is time to “shop around”.

Originally published as Why the banks can do what they like and ignore the RBA when it comes to cutting deposit rates