The battle for cash deposits in Australia has hit absurd levels with term deposits now yielding far more than mortgage rates. Please consider Bank deposit war lifts costs, says RBA.

The Reserve Bank has accused the major Australian retail banks of driving up their own funding costs by competing in a retail deposit war that has forced up savings rates to win customers.

The top four banks have engaged in an intense battle over the past year to attract retail deposits and ease their reliance on volatile offshore markets for funding.

The move has resulted in some term deposit rates being higher than mortgage rates for the first time in two decades.

The RBA said some “special” term deposit rates offered by the major banks were up to 180 basis points above the three-month bank bill rate, compared to just 75 basis points in December 2008 at the peak of the global downturn.

The average term deposit rate now is 5.93 per cent while the official rate is 4 per cent, implying a spread of 193 basis points.

“But it’s been interesting to see over the last two to three weeks it has moderated somewhat as far as pricing is concerned,” Mr Norris told a Credit Suisse conference in Hong Kong.

“I think that’s because banks are seeing it’s somewhat of a zero-sum game. There’s a pool of hot money that churns through the banks, and in the end it doesn’t materially change any bank’s market share.”

My Friend “BC” comments: This is likely to backfire when the Aussie credit bubble bursts during the next deflationary downturn, as real estate and commodities prices again fall and loans go bad, requiring Aussie banks to increase or maintain reserves against those deposits.

Mike “Mish” Shedlock
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