Why is there a difference between the Reserve Bank of Australia (RBA) rate and my financial institution?
We’ve had a few customers ask us questions about the RBA and their impact on the Australian market. In a previous post I covered off what role the RBA plays for financial institutions and in this post I’ll be answering another common question, why there is a difference between the RBA rate and that of a financial institution.
Because Financial institutions (FIs) operate by borrowing money from some people to lend to others; The average rate at which a FI lends must be higher than the rate at which it borrows (i.e. a positive interest margin) in order to cover its operating costs and deliver a return to its owners (i.e. a profit). FIs borrow money from individuals (retail deposits), professional investors (e.g. superannuation funds) and other FIs (interbank loans) both in their home country and, often, overseas. The rate it pays on all this funding is driven by the type of borrowing (and the credit risk and other commercial terms applicable), the country the money is borrowed from and the term (expectations of future rates). It is the weighted average cost of all these sources of funding that constitutes the FIs cost of funds, upon which it must base its lending rates to derive a positive interest margin.
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