Interest rate increases and the RBA

[whealy]

I understand why banks need to increase interest rates after the Reserve Bank of Australia increases rates.
40% of their funding is apparently from offshore.
So it would seem to me that the RBA increase in rates only affects 60% of their loans.
It would also seem to me that the banks should increase by less than what the RBA increases as their offshore rates are not affected by anything happening in Aust.
The should increase by less than the RBA by this reasoning.


Bill Healy

 

[Julia]

Re: Mr Bill Healy

You're hugely over-simplifying the banks' situtation.
Just for one thing, you are ignoring what they have to pay to attract domestic deposits.
This area has been very competitive for some time now.
Just consider how much above the cash rate on call online cash deposit accounts are paying.

 

[tothemax6]

But keep in mind that the banks are not government agencies. They are not actually there to try and keep interest rates low - higher interest rates is how they make their money (well one of the ways).
CBA would happily charge 20% on its loans, but of course, no one would take them and they would go bankrupt. Really, the banks issue the highest paying loans that they can without loosing business to competition (i.e. the 'market rate'), which yields the current interest rates.

 

[ROE]

banks are business with shareholders, they make as much money as they can get away with..

People take out loan with them should remember that they ripped you off if they can for their shareholders

As Gordon Gecko Would said

The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind.

 

[bellenuit]

I understand why banks need to increase interest rates after the Reserve Bank of Australia increases rates.
40% of their funding is apparently from offshore.
So it would seem to me that the RBA increase in rates only affects 60% of their loans.
It would also seem to me that the banks should increase by less than what the RBA increases as their offshore rates are not affected by anything happening in Aust.
The should increase by less than the RBA by this reasoning.


Bill Healy

From what I understand from listening to today's hearing is that even though the spot rate (I'm not sure of that is the correct term) for cost of funds from offshore is decreasing it can still mean that the banks are paying more. The example given said that compared to 3 years ago the cost of offshore funds are higher but not as high as when they were at their peak last year. The problem for the banks is that they borrow a lot from overseas on 3 year terms, so as these terms come to an end they need to roll over the loans on the higher levels of today (compared to 3 years ago) meaning their actual cost of funds is increasing while the spot rate is decreasing.

While you are correct in saying that a change in the RBA rate affects only a % of their loan portfolio, their cost of funding from overseas is increasing all the while, so they take the opportunity of RBA increases to also claw back the offshore funding increases.

The banks would prefer to be able to adjust their funding when they see fit, but it is politically easier to apply the pain in one chunk with RBA increases.

 

[doctorj]

I understand why banks need to increase interest rates after the Reserve Bank of Australia increases rates.
40% of their funding is apparently from offshore.
So it would seem to me that the RBA increase in rates only affects 60% of their loans.
It would also seem to me that the banks should increase by less than what the RBA increases as their offshore rates are not affected by anything happening in Aust.
The should increase by less than the RBA by this reasoning.


Bill Healy

https://www.aussiestockforums.com/forums/showpost.php?p=589541&postcount=7

This may help explain why the RBA headline rate isn't the only factor driving the rates that the banks charge borrowers. In short, people are right - it's only part of a bank's aggregate funding cost.

 

[Julia]

I'm so damn tired of all the focus being on borrowers. Only a third of Australians have variable home loans. Nearly twice as many have deposits.
Why is there such a total focus on bring rates down all the time?

I clearly remember paying 22% on an IP in the early 80's.

PS Re Mr Swan's 'banking review', some details of which were aired today, according to commentators one of his measures, i.e. the scrapping of exit charges, will most disadvantage the smaller institutions who apparently charge far more in this respect than do the big four.

Pretty funny, really, when he is intent on punishing the big four for being successful, and declaring he will even everything up so the smaller institutions are more competitive! Silly *****

 

[ROE]

They cant afford to upset the big boys, they consult them in the process.

Wayne: so we going to chuck out some reform, how you want it done?

Big 4: hmmm, I tell you what get rid of stuff where it hurt us a little but it hurts smaller mob a hell of a lot more and we cry wolf to the media Ok

Wayne: sound good, it look good on me, it look good for consumers, you guys crying over it so it must be damn bad for you guys and the public will love it

where to for lunch? Hyatt in Canberra?

 

[MACCA350]

I'm so damn tired of all the focus being on borrowers. Only a third of Australians have variable home loans. Nearly twice as many have deposits.
Why is there such a total focus on bring rates down all the time?

I clearly remember paying 22% on an IP in the early 80's.

Yeah, bring back a decent cash rate
Things seem to be too focused on debt and the plight of those with debt when there should be more incentive for people to save. Low interest rates are in itself a catalyst to increase debt and fuel property prices.
Just imagine what would happen to property prices if the mortgage rate were to increase from 7% to 22% overnight.......for the same monthly repayment someone would go from a budget of $500,000 to $180,000.
Hmmm, so which is the chicken and which is the egg.

Cheers

 

[Judd]

I'm so damn tired of all the focus being on borrowers. Only a third of Australians have variable home loans. Nearly twice as many have deposits.
Why is there such a total focus on bring rates down all the time?

I clearly remember paying 22% on an IP in the early 80's.

Your comments on the interest rate you were slogged jogged a memory. I recall when interest rates were climbing to 17.5% for owner-occupied, a number of people I knew locked into 3 year fixed at say 15%. Oh, how clever they were, was their boast. Then the rates started to go down and down and down. These same people then complained how unfair it was that their interest rate were not adjusted downwards. Usual human nature - only want the feelgood bits and not prepared to accept the consequences of their decisions or, more likely, never thought about the possibility of a downwards revision.

I remember reading a comparison between the most popular fixed rate which was then 3 year, as opposed to staying with a variable. The analysis was that due to fluctuations in interest rates over a cycle, those on fixed paid more interest than those on variable. And the fixed rate generally expired as interest rates were climbing, ie they had to fork out more in repayments than they were previously accustomed to which placed them under greater financial stress.

That's life, folks.

 

[Julia]

The reaction over the airwaves today from most interest groups regarding the government's banking 'reforms' is very negative.

Looks as though this is yet another thing that they have managed to stuff up, largely because of doing insufficient research and consultation.

 

[TKline]

Interest rates are still low by historical standards. Expect much higher rates in the years ahead. It's about time savers were rewarded instead of punished!

Mortgage rates will rise regardless of RBA moves.