Centec Securities Reports on Australian Banks’ Interest Rate Transmission: A Comparative Analysis
Australian Banks Outperform New Zealand and the US in Passing on Interest Rate Rises, Notes RBA Official
BRISBANE, AUSTRALIA, October 18, 2023 – (SeaPRwire) – , represented by its Chief Executive Officer, Brendan Taylor, and Director of Capital Markets, David Quinn, has brought attention to the fact that Australian banks have, up to the present time, passed on approximately 75% of the interest rate increases implemented since May 2022 to their depositors. This observation arises within the context of ongoing discussions concerning the ramifications of interest rate adjustments for borrowers, with expectations of further increases on the horizon.
The cash rate set by the Reserve Bank of Australia (RBA) has experienced a 400-basis-point rise since the commencement of rate adjustments. The surge in deposit rates, approximately 300 basis points, is consistent with historical trends observed during earlier phases of interest rate hikes. Notably, this rate transmission surpasses that observed in New Zealand and the United States, where banks have transmitted only 50% and 35% of the rate increases, respectively.
also noted regarding borrowers, the share of household disposable income allocated to servicing debt has escalated from 7% to nearly 10% over the past 17 months. This percentage surpasses the previous peak recorded in 2008 when the cash rate stood at 7.25%. Households with substantial mortgages now bear a more substantial portion of their income in servicing their debts.
analyst’s review of RBA’s assessments indicate that elevating the cash rate from 0.1% to its current level of 4.1% would potentially lead to an annual reduction in household spending by approximately 0.4% to 0.8% via the cash-flow channel. Correspondingly, RBA modeling suggests that these rate hikes could result in business investments being approximately 4% lower than they would have been over the next two to three years.
Furthermore, higher interest rates have exerted downward pressure on asset values such as stocks and properties, consequently diminishing spending through the wealth effect. Taylor highlighted that in the Australian context, a 1% decline in wealth correlates to a reduction in consumption of about 0.1% to 0.2%, in line with estimates for other nations. Nevertheless, Taylor added that the recent surge in population growth had halted the decline in property values.
The repercussions of higher interest rates on the economy extend to a diminished capacity for both households and businesses to secure loans. Quinn pointed out that the increase in the cash rate since May 2022 has culminated in a decrease of approximately 30% in the borrowing capacity for an average household. Consequently, housing loan commitments have likewise fallen by a similar magnitude since early 2022, although other factors, such as reduced demand for credit, may also be contributing.
In conclusion, Taylor emphasized that “the time lags in transmission mean that the full effects of the rate increases to date are yet to be fully realized throughout the economy, which will continue to propel efforts to lower inflation in the near future.” He underscored that “further tightening of monetary policy may be necessary to ensure that inflation, which remains elevated, returns to the target range within a reasonable timeframe.”
In subsequent comments, Quinn acknowledged that it was premature to ascertain whether higher housing prices would pose a “problematic” challenge for interest rates, potentially incentivizing increased consumer spending. While the current environment differs somewhat from previous rate hike cycles, sales volumes remained “relatively subdued,” and banks had exercised restraint in their lending to households. Quinn indicated that this situation would be subject to close monitoring.
Head of Press & Communication
Centec Securities PTY Ltd
80 Ann Street, Brisbane, QLD 4000
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