Why don't the banks pass on the full interest rate drop?

August 05, 2016
Peter Ruddock

It's a tough job but you need to try and filter out the facts from the stories being spun by both TV and newspaper journalists to get ratings

The easiest way I have of explaining the issue is that bank interest rates used to be tied into what the Reserve Bank did until the Government deregulated the industry and allowed the banks to do what they wanted based on 'normal' commercial reasons - in other words price your products (loans in this case) taking into account what your competitors are doing so customers will buy from you. At the same time we saw many new players - non banks, small banks, credit unions, building societies, etc enter the mainstream market and be available to everyone.

We now have a competitive market with both big and small players competing for market share. A great systems where, hopefully, the consumer is the winner.

The downside is that the companies (banks) that the government has made competitive now need to source their products (money) from more sources than one. Picture in this case an electrician who needs to buy light globes to instal for his customer. He doesn't have just one supplier, he has many, so he considers who has the best quality, the best range and, of course, the best price. Banks are similar in that they don't just have the Reserve Bank as their source of funds so the Reserve Bank becomes just one of their suppliers.

So, let's relate that to the electrician again. Just because one of his suppliers changes their prices by a specific amount has no bearing on the price he charges to his customer. He takes it into account of course, but he also takes into account what his competitors are doing.

The banks have one more factor to take into account when they change their pricing - one large factor our electrician does not need to worry about. It's how the press spin the story to 'force' the consumers to react to any changes.

My advice - shop around, use your Mortgage Broker to get the deal that suits you best and stop reacting to the stories that sold today's newspaper.

 

Posted in: Interest rates

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