How low rates are driving consumer choice

  • By Nitish Bhatt

The low rate environment is driving sizeable shifts in consumer demand for deposits and lending underpinned by the rate differentials between these two types of products.

The year was 2019, the month was June, after 34 consecutive months of no change, the Reserve Bank of Australia (RBA) cut the cash rate by 0.25 per cent to 1.25 per cent.

“The Board took this decision to support employment growth and provide greater confidence that inflation will be consistent with the medium-term target,” RBA governor Philip Lowe said at the time.

Since then and as the health pandemic unfolded, Australia’s central bank has decreased the cash rate 4 more times and it now stands at 0.25 per cent.

Given the flow-on effect the cash rate has on the way banks price and the dualistic nature of the products they offer i.e. deposits vs lending, RFi Group research has found a shift in demand across lending and deposits.  

A product that has seen a sizeable decrease in demand has been the term deposit. It comes at a time when the interest rates offered between term deposits and savings accounts has increasingly narrowed since the start of the RBA’s easing of monetary policy.

Crunching the numbers, Canstar identified a gradual compression of rates. With the cash rate at 0.25 per cent, the savings account average is now 0.41 per cent higher and the term deposit average is 0.65 per cent above the cash rate.

Furthermore, Steve Mickenbecker, Canstar’s finance expert recently stated that “the data confirms that through the RBA easing cycle term depositors have been the big losers, contributing more than their share to banks' margin management”.

According to RFi Group data consumers demand for savings account has overtaken the demand for term deposits.

Source: RFi Group

There is also some evidence that consumers are recognising this potential loss they may face from this interest rate differential as highlighted by Mickenbecker.

Since the latest cash rate was cut, RFi Group data suggests that there was 12 per cent decline in the proportion of consumers who held a term deposit.

From a lending perspective, there hasn’t been a sizeable increase in the intention to take a new mortgage despite the multiple rate cuts.

However, an area where there has been strong growth is the refinancing market.

RFi Group suggests that the gap between refinancing intention and actual refinancing has narrowed over the June quarter, driven by an increase in the proportion who have refinanced in the last 12 months.

Source: RFi Group

Interestingly latest data from both APRA and the industry has revealed solid increase in mortgage refinancing.

Given the coronavirus induced recession we find ourselves in currently, RBA’s monetary policy decision going forward is likely to play a heightened role on consumers demand for banking products.

Nitish Bhatt is a lead analyst with RFi Group