When the Reserve Bank of Australia (RBA) changes interest rates does that mean my financial institution will too?

Following on from my previous posts about the impact the RBA has on the Australian market and why there is a difference between the RBA rate and that of a financial institution, in this post I’ll be covering off another common question we are asked – when the RBA changes interest rates doe that mean my financial institution will too?

When the RBA changes official interest rates, this will influence the FIs cost of funds but there is not a direct correlation. For example, money borrowed from overseas might not be influenced at all and it will take a number of months for term deposits to mature and reset to the new rates. FIs also operate in a competitive environment and will need to monitor what rates its competitors offer to ensure that its rates remain relatively attractive.

Each financial institution must make its own decisions about its interest rates based on all these factors; the rates are not set by a regulator. These factors will determine how much an FI changes its interest rates by, and when, following a change in the RBA official interest rate. In fact, it is common for retail rates to shift up and down even when the official rate doesn’t change, just less so with variable home loan rates because these are politically sensitive.

If you have any questions about the RBA or about interest rates feel free to leave a comment on this post and I’ll get back to you.

^Wayne – Chief Financial Officer