Ahead of the cash rate decision this afternoon, the previous owners of the lowest interest rate in Australia, BCU, has lifted the lid on how banks are setting interest rates in the current financial climate.
BCU had the lowest rate in Australia until last week, when they raised their 1.67% one-year fixed in response to market conditions.
Though there is no expectation that the Reserve Bank of Australia will change the cash rate any time soon, there is increasingly a discrepancy between what the central bank says it will do, which is keep the cash rate at 0.1% until 2024, and what the banks think that it will do, which is raise the rate ahead of schedule.
“Most of the long-term rates have been lifting, when you look at the yield curve,” said Michael Ribbens, General Manager at BCU.
“Most banks have been progressively increasing their interest rates, particularly fixed rates. We held back for as long as we could. We’re still really competitive, one of the lowest in Australia at 1.89% one-year.”
“The fixed rates are on an upward trend and, while I don’t see the cash rate changing any time soon, I do see some of the longer rates slowly creeping up.”
CBA signalled their thinking that rates would go up ahead of the RBA prediction by raising their long-term rates, with a slew of competitors following suit.
“We will always look at what the competition is doing, but the cost of funds of every bank is going to be slightly different,’” said Ribbens. “It depends on retail deposits, wholesale deposits and each bank has a matrix of cost bases on where they raise money and how they push it out.’
“We look at that, and at the long-term yield curve, and what it is costing us to buy money for two or three years knowing that we still have to preserve a small margin to make a profit. Being a customer-owned bank, we want to pour every dollar that we can back to our members.”
“We’re always mindful of what that yield curve is looking like and it gets to a point where you have to lock in swaps and things like that to ensure that you can preserve profit long term. We would meet every two or three weeks to look at that, and where we see it going."
“When it’s going to be a longer, higher term cost in the outer years, that’s when we change the fixed rate.”
BCU are still able to offer very competitive numbers despite the rise across the board.
“At the variable rate, we have one of the cheapest in Australia at 2.44%, and we’re happy to leave it sitting where it is,” said Ribbens. “With fixed, we had to move it up a little bit more and we’re noticing that a lot of our members are starting to lock in fixed money because they can see that rates aren’t getting lower. They’re only going up from here.”
BCU were also happy to launch a new product, though to be unique in the market:
BCU is doing a lot to attract the younger generation. We’ve got the First Home Buyer Deposit Scheme, which started July 1, and last week, we’ve offered a $5,000 cashback. That’s market-leading, nobody in Australia is doing it to that degree.”
“We’re happy to give back to the community and if we can give some of the younger first home buyers and families to have cheaper rates and we can provide a low cost product with no application or monthly fees, it’s a proposition that is attractive in the marketplace.”