Interest rates are finally going up after 10 years, so it is time for a refresher on what makes banks decide to pass on rates to customers and how exactly they boost their profit margins.
Well, it’s been more than 10 long years, but interest rates are finally going up.held a news conference to say the bank had got its forecasts wrong.
Since it’s been so long since interest rates went up, it’s worth running through exactly what interest rate changes mean for the banks and how they make money from home loans.Yes, they do make more money when interest rates are higher, but not in the way you might think. Their profits don’t go up simply because you are paying a higher amount of interest as a result of a rate increase.
So, when the overnight interest rates are increased by the RBA, base interest rates across the economy go up. One is that most loans written by Australian banks are financed by deposits. Some of these deposits, such as term deposits, pay relatively high-interest rates while some deposits, such as a savings or transaction account, don’t pay anything at all.
That trend is now reversing and the banks are reinvesting maturing bonds at a now higher rate, and that’s boosting their margins. This is where there has been a considerable change in behaviour. Before interest rates fell to near zero, banks had to compete for deposits by offering attractive term deposit rates.
Macquarie estimates that over the next three years, higher rates will lift profits by about $1.6 billion, or around 3 per cent to 5 per cent.
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