Would banks use Reserve Bank rate cuts to claw back a bit extra from savers?

While the sharemarket and media are abuzz with predictions of when interest rates will fall, there’s one very large group of people not sharing the excitement: savers.

Many savings accounts have been paying interest rates of near 5 per cent for about the past year, but the days of these sorts of returns are surely numbered, as the Reserve Bank inches closer to cutting the cash rate.

Analysts say rate cuts could prompt banks to “re-price” what they pay on savings accounts.Credit: Josh Robenstone

However, the Reserve Bank isn’t the only potential source of pain on the horizon for savers. Some analysts also believe the commercial banks may ultimately cut savings rates by more than whatever reductions the Reserve makes to the cash rate. In other words, they think banks could use the cover of Reserve Bank rate moves to hit savers with super-size rate cuts.

The $1.5 trillion market for retail deposits – which attracts less scrutiny than the mortgage market – plays a crucial for households and banks alike. But recent changes show how the tide is gradually turning for savers.

First, interest rates on term deposits have plummeted, as banks have reacted to market bets the central bank will cut the cash rate in early 2025. RateCity says 40 banks cut term deposit rates last month, and the big four have all cut in recent weeks. To be fair, that’s how term deposits work – they’re priced off market expectations.

Second, some big banks have recently fiddled with the pricing of savings accounts in a way that is complex and likely to support margins.

ANZ recently trimmed rates on its online savings account, reducing the “base” rate paid to existing customers by 0.1 of a percentage point to 1.4 per cent. At the same time, it increased the “introductory rate” (only paid for the first three months after customers open an account) by the same amount of 0.1 of a percentage point.

Westpac made a similar change last month. It cut the “base rate” on one of its savings accounts by 0.15 percentage points, while raising the “bonus” rate (which only applies if customers meet certain conditions) by the same amount. This means the headline interest rate (bonus rate plus base rate) is unchanged, but people who don’t meet the conditions will get less.

ANZ also made a change that means customers of its digital offshoot ANZ Plus Save must meet new conditions to get the best rate, at the same time it nudged up the rate.

These customers must now grow their balance by at least $100 a month, excluding interest, to get the top rate of 5 per cent. Previously there were no such conditions, though the top rate was slightly lower, at 4.9 per cent. These changes mean this account is more like those offered by competitors.

‘Whilst the home loan continues to hog the narrative, the reality is the riches reside in deposits.’

Matthew Wilson, Jefferies analyst

Now, these are not enormous changes in the scheme of things. But you may have noticed these tweaks are pretty complex – and that’s no accident.

They are all examples of what the Australian Competition and Consumer Commission (ACCC) calls “strategic pricing”, and some analysts believe the banks will employ these sorts of techniques to limit the squeeze on profits when interest rates fall.

Morgan Stanley’s Richard Wiles said the recent Westpac change and the ANZ change to its online saver were “relatively minor” tweaks, but they showed the different “levers” available to banks. He said there could be an opportunity for deposit “repricing to support margins” when the Reserve Bank cuts rates.

“In fact, our forecasts assume that the RBA will cut rates by 75 bp [basis points] and the major banks will reduce their bonus savings and standard savings accounts by an average of -40bp and -20bp more than the cash rate, respectively,” Wiles wrote.

Against this, banks might think it’s too politically risky to out-cut the central bank when it comes to savings accounts – especially when there was an ACCC inquiry only last year.

All the same, the recent changes show how banks manage to make the humble savings accounts pretty complex. If you want the higher “bonus” rates, you’ll typically have to jump through hoops such as making a minimum number of deposits or growing your balance each month.

This complexity serves a commercial purpose. Banks naturally want to limit their costs from paying interest, but they also depend on retail deposits for almost 30 per cent of their funding, on average. So, they compete selectively, targeting “sticky” deposits that are less likely to be withdrawn suddenly, while paying less to those who don’t meet the conditions.

This means many people miss out on competitive interest rates: the ACCC last year said 71 per cent of customers didn’t get the “bonus” rate in the first half of 2023, on average. The watchdog also found these strategies further complicate the market, so it’s difficult to compare accounts, and people rarely switch banks. All of which suits banks nicely.

It’s difficult to compare accounts and people rarely switch banks.Credit: Louie Douvis

Indeed, banks’ ability to tap low-cost deposits is a key ingredient in their profits. Jefferies analyst Matthew Wilson puts it this way: “Whilst the home loan continues to hog the narrative, the reality is the riches reside in deposits.” Even so, he questions whether the situation is sustainable in a world where money is increasingly digital, and when environmental, social and governance principles get a bigger say.

Treasurer Jim Chalmers has vowed to help customers get a better deal on their deposit accounts, and in June announced changes that resulted from ACCC inquiries into home loans and deposits.

The government will force banks to tell customers when interest rates on savings accounts change, and it wants to improve how banks tell customers about “bonus” rates, or the end of “introductory” rates, among other changes.

Chalmers is likely to introduce legislation for these changes next year – which may well coincide with Reserve Bank rate cuts. When those cuts happen, banks will face ferocious political pressure to pass on the reductions in full to mortgage customers. Savers should also be on the lookout for any “repricing” in the less scrutinised market for household deposits.

Ross Gittins is on leave.

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