Mixed Blessing

Sydney Morning Herald

Wednesday September 5, 2007

By John Kavanagh

The chase for market share has changed how banks and others react to Reserve Bank interest rate rises.

The way financial institutions set their interest rates is undergoing a change. The established pattern, where banks and others track movements in official rates set by the Reserve Bank, is giving way to a more varied range of responses.

This means that borrowers and savers will need to keep a closer eye on how their financial institution handles rate changes and how it performs compared to its peers.

In most cases lenders will still vary their home loan rates in line with Reserve Bank changes but the number of anomalies is growing all the time.

Credit card issuers now make a range of different responses to official rate movements. Rates on some cards move hardly at all, while others increase by considerably more than the Reserve Bank's benchmark.

Perhaps the most anomalous situation, and the most unfair, is in the transaction banking market, where financial institutions have made no change to rates in response to any of the past nine changes in official rates.

Tying consumer lending and deposit rate changes to movements in official rates is no more than a convention. Financial institutions fund their business from a wide range of sources and changes in official cash rates will affect them to varying degrees.

Greater competition in banking is one of the factors that is forcing a break in the nexus between official rates and consumer lending and deposit rates. This is most obvious in the credit card market, where some issuers of low-rate cards have kept their rates low for fear of losing their marketing advantage.

Another factor is that different financial institutions use different funding sources and face varying cost pressures.

The non-conforming lender Bluestone announced that it would increase rates on its loans by 17 to 55 basis points, in addition to the 25 basis point rise in official rates announced on August 8. Bluestone cited higher funding costs as the reason.Credit cards A few credit card issuers took the opportunity to raise their credit card rates by more than the 25 basis-point cash rate rise.

Aussie Home Loans put up the rate on its Aussie MasterCard by 50 basis points, from 10.49 to10.99 per cent (all figures cited are supplied by InfoChoice).

Consumers who use National Australia Bank credit cards had mixed fortunes. The rate on the Ant Amex card went up 55 basis points, while the rate on standard Visa and MasterCards went up 51 basis points. The rates on the Ant Gold card, the Ant card with rewards, Velocity cards and Visa and MasterCard gold all rose by 25 basis points.

Users of St George Bank's Vertigo low-rate card took a big hit; the rate went up 96 basis points from 8.99 to 9.95 per cent.

Westpac put up the rates on its Altitude cards and 55-day Visa and MasterCards by 36 basis points, while its other cards rose by 25 points.

An emerging practice is to price cash advances differently from purchase rates. Aussie put up the cash advance rate on its Aussie MasterCard by 75 basis points. The rate is 14.99, compared with the purchase rate of 10.99 per cent.

Westpac put up the cash advance rate on its 55-day Visa and MasterCard by 200 basis points (two percentage points), from 17.99 to 19.99 per cent. With those changes Westpac has the dubious distinction of having the highest credit card rates in the market.Home loans Leaving aside the low-doc and non-conforming segments of the mortgage market, the great majority of lenders moved their variable rate loans by 25 basis points. The interesting moves were in fixed rates, where lenders have competed to hold their rate down as much as possible. Increases ranged from 10 to 20 basis points.

A couple of lenders, ING and mecu, kept a tight rein on things, increasing their fixed rates by only four basis points. RateBusters actually cut its fixed rates by as much as seven basis points.Savings accounts A number of financial institutions baulked at passing the full 25 basis point increase in the cash rate to customers in their cash management and high-yield savings accounts.

BankWest, which has been the pacesetter in this segment for the past couple of years, managed only a 20 basis point increase in the introductory rate on its TeleNet Saver account. The rate increased from 6.8 to 7 per cent.

Others that limited their savings account increases included Asgard, whose Cash Connect account rate went up 20 basis points from 5.45 to 5.65; ING Direct, whose Savings Maximiser rate went up 15 basis points from 6 to 6.15 per cent; and RaboPlus, whose RaboPlus Savings Account went up a miserly 10 basis points from 6.6 to 6.7 per cent.

Gateway Credit union bucked the trend by putting up rates on its eMax Saver account by 30 basis points from 6.1 to 6.4 per cent.Term deposits Institutions were similarly tight-fisted when it came to passing on the rate increase to term-deposit customers. Arab Bank could manage only a five basis-point increase in its one-year to five-year rates. It did better with short-term rates (30 days to 180 days). ING Direct also limited some of its term-deposit rate increases to five basis points.

Some banks, including Citibank, cut some of their term-deposit rates.

Going against the trend were National Australia Bank, which put a number of its term-deposit rates up by 40 basis points, IMB Building Society (30 basis points) and Savings & Loans Credit Union (30 basis points).

© 2007 Sydney Morning Herald

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