A rates omen from Westpac

Like Westpac's latest deposit rates cut, future reductions will have limited effect as banks strain to retain self-managed super investors in the wake of funding pressures.

One more big bank has blinked on term deposits but the severe competition for money means that the rate falls are again minor. In turn, that means bank margins will be under pressure.

The big banks will be looking to trim costs. The stimulation from the Reserve Bank official rate cut will be limited and will not boost demand for lending dramatically.

The funding pressure that banks are under means credit will continue to be tight. It is likely that there will need to be further official rate cuts but, like this week’s move, their effectiveness will be lower than in previous cycles. In essence, Australia expanded on cheap overseas money which is no longer available.

Yesterday ANZ Bank trimmed its term deposit rate and this morning Westpac followed (ANZ blinks first, May 2; ANZ scrubs up for its bypass, May 2). NAB and CBA are still holding their old rates. The smaller banks will usually offer better rates.

As I pointed out yesterday, ANZ dropped its six-month rate from 5.5 to 5.3 per cent and its five-year rate from 5.6 to 5.4 per cent.

Today Westpac followed ANZ in the six-month rate and trimmed its five-year rate from 5.8 to 5.7 per cent – the same rate as NAB and CBA (Westpac's new normal, May 3).

While Westpac's true term deposit rates have come down a lot in recent months, the current decreases go nowhere near the half a per cent official rate cut. They can’t come down too far because the self-managed funds who are replacing a lot of the overseas money will respond by going off to the sharemarket with their money. The banks need it to fund their book.