Today’s Economics vs. Common Sense

The Reserve Bank (RBA) reduced the cash rate to one percent on July 2. The cash rate, for those who don’t know, is the rate at which banks borrow from and lend to each other overnight. What has that to do with interest rates which apply more generally in the market place. ‘It depends’ is the answer.

It depends on banks having a captive market of depositors and acting collegiately (a kinder word than collusively) to raise or lower rates. So, when the RBA lowers the cash rate, which has nothing directly to do with funding costs, banks all dutifully act together to lower their deposit rates and, lo and behold, their funding costs fall. Stuff depositors. Political pressure, and the costs they face in raising funds other than through deposits, then determines the degree to which their lending rates move in sync with the cash rate.

When interest rates are bought down depositors suffer – particularly those with limited savings and those in retirement who are understandably…