the mozo blog

We’ve now started to see other banks’ responses to the Reserve Bank’s interest rate rise on Melbourne Cup Day – others apart from the astonishingly audacious Commonwealth Bank, who are clearly Determined to Break Profit Records.

Flying in the face of the majors’ insistence that interest rates “must” go up beyond the Reserve Bank’s increase, a number of smaller players have announced that they are passing on no more – and in some cases, even less.  By Friday we had heard from Newcastle Permanent Building Society, Greater Building Society and Laiki Bank – all announced a 0.25% increase.  ME Bank did the same for their super fund members’ loans, but passed on only 0.15% to their other customers.  And Yellow Brick Road, run by former Wizard boss Mark Bouris, have confirmed that they will not pass on any increases to their variable rates until February.

How can this be possible, if what the Big 4 are saying is true?  Well it seems the smaller players are taking a look at the whole picture, and realising that even if your funding costs have gone up it can make good business sense not to pass on the entire increase to your customers.  There is value to be gained in keeping prices down for existing customers in order to encourage them to stay.  There is value in keeping prices down for new customers in order to make it easier to get more of them and to keep the cost of acquiring them down.  And there is value in maintaining the standing of your brand in order that all of your other businesses remain strong.

For my sins, I have previously worked closely with the pricing boffins in large financial institutions.  I know that their pricing models are not very good at taking these other sources of value into account:  in the world of their models, if costs go up and the target return on equity remains the same then the only sure way to balance the equation out is to find costs savings elsewhere or to increase prices.  And I can tell you from personal experience that if you try to talk to them about the value to be gained from being nice to your customers, they look at you as if you are from another planet.

In some ways, getting banks to change their ways is a bit like the argument for putting a price on carbon.  If businesses place no value on CO2 emissions, then they have no incentive to take them into account in the decisions they make.  They can pollute away and we all suffer, and the only way to turn the tide is for governments to place an explicit cost on the emissions.  In the same way, if banks don’t place a value on how customers feel then someone must act to force them to.  And the most effective way of getting banks to place a real and large economic value on customer satisfaction is this:

If you don’t like your bank, leave them.  Vote with your feet.  If enough people do it, then the finance boffins will have to put it into their pricing model: when prices rise, people leave.  And only then will the bank chiefs take notice.

Don’t wait for Wayne Swan.  Or Joe Hockey.  Or GetUp, CHOICE or the ACCC.  You can make the difference.

And we hope that you’ll find all the products, rates, information and tools you need to find your new home loan, right here at Mozo.

Home-owners will have breathed a sigh of relief at the RBA’s decision this week not to raise interest rates. But have we really dodged the higher-repayments bullet for another month? Or are the big banks preparing to open fire — and raise their rates regardless of the Reserve Bank?

Despite reports from ANZ, Westpac and NAB that they’d follow the RBA in maintaining current rates, each bank has left a back door open on an out-of-cycle rate rise. Take ANZ’s carefully worded commitment: “Interest rates are always under review, but there is no immediate trigger at the moment for any change.” Could an immediate trigger at another moment change that tune — for example, a CBA rise next week?

ANZ chief executive Mike Smith has already hinted at his interest rate intentions, saying that with the increased cost of foreign funding, “something has to give”. CBA’s Ralph Norris put his additional funding costs at $1.2bn a year. And while the RBA has declared that bank profits are more than healthy enough to cover these costs – earnings are up and the banks are more profitable than they were pre-crisis – the Big Four aren’t known for absorbing increased costs for the benefit of the Australian home owner.

So the general feeling is that the big banks were less than impressed when the RBA defied market expectations and sat tight on a base rate of 4.5%. It’s one thing for them to slip a few extra points onto an RBA raise. It’s another for them to slap on an out-of-cycle rise.

Back to those bullets, however — and you can probably expect a Big Four rate rise in November, regardless of the RBA’s decision. Prior to that, any enemy fire is expected to come from the Commonwealth corner, as they have the largest mortgage book and the greatest exposure to increased cost of foreign funding. Also, because they’re yet to declare their immediate position.

And any rise from CBA will likely be met with moves from the other big banks. Don’t you just love an oligopoly?

To escape the firing squad — why not check out the home loan competition? Our rate chasers will be keeping track of any rate moves throughout the month so visit our Reserve Bank Interest Rate page for all the latest info.

And stay tuned for our Rate rise punt: the real Melbourne Cup Day odds.

After much debate and conjecture, the Federal government finally issued what has been widely labeled as a cautious and narrow response relative to the broad and expansive scope of the Henry Review of the taxation system. Indeed, only a smattering of the 138 recommendations outlined in the review have been taken on board for this round of reform. Left off the list were the anticipated new tax concessions on savings. Attention instead turned squarely towards superannuation with Australia’s aging population looming as a big issue.

While a lot of the focus will be on the exclusions, there were some significant steps made towards reform yesterday, the three cornerstones being:
* A 40% tax on mining industry profits, labeled as a resource rent tax on their “super profits” and netting the government $12 billion in forecast revenue between 2012-13.
* Increasing the superannuation guarantee from 9% to 12% by 2020 with the government to contribute $500 for people earning up to $37000.
* A cut in the company tax rate from 30% to 28% by 2015. Small businesses will get the cut by 2013 as well as receiving a range of other new benefits.

The changes announced yesterday have been earmarked as the first step in a wave of changes in enacting revolutionary tax reform. The government has explicitly stated that there will be more announcements in the future on savings incentives, as one of central issues to be addressed in the government’s second term agenda. This still leaves both financial institutions and consumers in the lurch for the foreseeable future however. Many hoped that by increasing bank-held deposits, the saving concessions would help reduce funding costs by alleviating the need to rely so heavily on foreign debt, thereby reducing the need for banks to enact mortgage rate rises above that of the Reserve Bank.

So all up it’s much the same for most of the players in the banking sector, at least for now anyway. All eyes now turn to Martin Place tomorrow, as we see what effect these changes (or lack thereof), will have on the Reserve Bank’s monthly cash rate announcement. Mozo’s rate chasers will be out in force, so be sure to check our Reserve Bank interest rates page from 2:30pm tomorrow to get all the latest news and rate changes as they happen.

Banking comparisons made easy at mozo.com.au

The words ‘tax’ and ‘exciting’ make strange bedfellows at the best of times, but it really can be described as a potentially exciting time for Australians on the tax front. Consumers look set for a double boost this Sunday, when the Federal Government finally releases its findings and decisions derived from the ‘Henry review’ of the tax system. Chaired by the head of the Federal Treasury, Ken Henry, the review has been labeled as a “root-and-branch” review of Australia’s tax system, and by all reports consumers could see gains with regards to both their savings and their mortgages as a result of some of the potentially adopted findings. Dr Henry handed over the report to Treasurer Wayne Swan in December 2009 and since then, Treasury officials have been working on the government’s response to the review.

In terms of Australia’s banking climate, the review looks set to cause a possibly portentous shake-up of the savings account market. Australia is one of the few countries in the developed world to currently tax bank savings at the full rate, a tag which by all reports will be shed soon, with the government preparing to offer significant tax breaks on savings. Whilst the extent of these breaks are as yet unknown, they are unlikely to match the UK model of which where individuals can deposit close to $17,000 (£10,200) tax-free. Dr. Henry is a known admirer of the UK system, yet many in the media are purporting rumours that something similar to the concessions currently in place for superannuation accounts will be announced instead. However, considering the range of options available in terms of size, scope and delivery, there’s no way to be sure till we hear what Wayne Swan has to say himself.

The tax break would also be a huge boost for Australia’s banks as it could generate billions in additional deposits, potentially lowering their funding costs through reducing the reliance on overseas finance. As a result of this, consumers could potentially receive a boost with regards to home loans payments. The banks have been very quick to use high funding costs to justify mortgage rate rises above that of the Reserve Bank‘s cash rate increases. With funding cost pressures alleviated to a significant degree, the government may well turn around and use this savings deposit boost as political leverage aimed at forcing banks to keep mortgage rates down and in turn, voters happy.

Either way, as far as the banking industry is concerned, consumers look to finally be on the receiving end of some good news. Mozo’s Rate Chasers will have a full wrap-up of all the implications for both deposit and lending accounts here on Monday, so be sure to check back to see what all the new changes mean for you.

Compare savings accounts at mozo.com.au

RBA Governor Glenn Stevens has released the text of another speech, this time to business leaders in Toowoomba. And so it’s time for analysts, pundits, commentators and generally interested persons to pick over his themes, his words and the general vibe of the thing, to try and second-guess what the Reserve Bank of Australia will do to interest rates next month.

As always, there’s something for everyone. References to good economic news and references to risks and uncertainties. If you want to predict that rates will go up in May, you can quote him on the speed of the rate cuts in 2008/9 and suggest that he’s paving the way for faster rather than slower increases. If you want to predict that the RBA will pause in May and leave rates steady, you can quote him on the need to leave flexibility in how we respond to the way the recovery unfolds. And there’s plenty each way in his analysis of the global economic recovery.

But look closer. We’ve found an ingenious code hidden in the speeches of the RBA Governor. And an astonishing truth… unveiled at last!

He tells us that, when responding to the GFC, the RBA cut rates by 375 basis points over 5 months. And that so far, they’ve responded to the recovery by increasing them by 125 basis points over 7 months, “…which is still only about a third the pace of the earlier declines.” Now 375 over 5 equals 75, but notice that 125 over 7 is well short of a third of this – it is not even a quarter! Rather than a numerical error, this is actually a clue. To get to exactly one-third, you need 200 over 8… and a 75 basis point increase in May would do exactly that! Unbelievable!

A 75 basis point increase next month is a shocking conclusion, well outside what most observers predict, but one clearly supported by the clever trail of clues he has left. But, rest assured that this would be the final increase: his speech contains 3133 words, and 3+1+3+3 = 10, and 1+0=1, ie he’s telling us that there is just one last rate rise.

Silly? Yes, but it is no less scientific than some other predictions people make from picking apart his speeches for clues. The RBA has told us clearly that there is likely to be a little bit more to go, but that the timing is up in the air. That’s all the clues they are going to give us. Maybe May, maybe June, maybe both, maybe neither.

So instead of predicting what the RBA might do, here at Mozo we’ll keep our eyes on what financial providers do in response. Every month, Mozo’s Rate Chasers update Reserve Bank interest rates with information about home loan rate rises as it comes in. And of course, you can find everything you need in our extensive database of rates, fees and features, for home loans, credit cards, savings accounts, term deposits, personal loans and bank accounts.

mozo.com.au. we chase. you save.