Bank battle for savers to lift deposit and mortgage interest rates
By Clancy Yeates
1 July 2018 — 11:05pm
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Fierce competition for funding is forcing banks to pay more for deposits, a trend that is crunching lenders' profit margins and sparking predictions of mortgage interest rate hikes.
Fixed interest broker Curve Securities says that in recent weeks banks have been paying up for wholesale term deposits, with interest rates on some products pushed up to their highest level in almost two years.
Your mortgage could be about to get ore expensive.
Photo: Virginia Star
There are also signs the pressure on banks to secure funds is flowing into the consumer deposit market, with new analysis from interest rate comparison website Canstar showing a trend towards higher retail term deposit rates in recent months.
Deposits account for about 60 per cent of major bank funding, so experts say the trend is likely to result in banks increasing mortgage interest rates to offset some of the hit to their profitability.
Managing director of Curve Securities, Andrew Murray, said a bank last week paid 3.05 per cent for a one-year term deposit in the wholesale market, the highest seen by the firm since August 2016.
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Rates on three month term deposits have also lifted from 2.45 per cent to 2.8 per cent since the start of the year, he said.
"It's a significant move up in rates that reflects some of the funding pressures that seem to be systemic at the moment," Mr Murray said.
That will eventually flow through to the man in the street in terms of their deposit rates, and ...their mortgage rates.
Curve Securities managing director Andrew Murray
"In the wholesale space where banks are looking for specific dollar amounts and are willing to pay up, we are seeing rates that we have not seen for a number of years, all across the curve.
"That will eventually flow through to the man in the street in terms of their deposit rates, and also the man in the street in terms of their mortgage rates. It's almost unavoidable."
Bank of Queensland last week raised mortgage rates, blaming higher funding costs, and ME Bank also raised rates in April for the same reason. Whether the major banks will follow suit in the current hostile political environment is debated by banking analysts.
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Although there has been little movement in the big four banks' retail deposit rates, figures from Canstar show other banks have begun lifting their rates for terms of less than one year.
Canstar group executive Steve Mickenbecker said term deposit rates had been moving down earlier in year, "by May and June movements in term deposit rates have overwhelmingly been up."
"At this point, movements are largely in the 10, 15, 20 basis point range,'" Mr Mickenbecker said.
"The overwhelming conclusion is that bank funding costs are on the rise. Good news for savers and self fund retirees, but not such a good sign for home loan borrowers. Whatever the RBA does home borrowers should be expecting to see rate increases from their lender."
The rise in deposit rates is linked to the increase in banks' wholesale funding costs, a trend bankers have been nervously watching since early this year.
Mr Murray said banks were being forced to "leap-frog" each other on term deposit pricing to secure the funding, because available funding had become more scarce.
Mr Murray pointed to a sharp slowdown in the growth in the supply of "broad money," which refers to currency and cash held by banks in deposits.
"There's a smaller pie for banks to access funds to fund the credit growth. They are all leap-frogging each other," Mr Murray said.
Citi analysts Brendan Sproules and Andrew Tam on Friday highlighted the growing pressure on banks' short-term funding costs, predicting mortgage rates would rise by an average of 0.08 percentage points across the big four's home loan portfolios.
