Economy2 min read
How the RBA cash rate finds its way into bank margins
The path from a Reserve Bank decision to a bank's profit line runs through mortgages that reprice in weeks and deposits that don't — timing is the whole game.
When the Reserve Bank moves the cash rate, bank share prices react within minutes. The actual profits take much longer to move — and understanding the lag is most of what you need to read a bank result intelligently.
Start with the machine
The cash rate is the interest rate on overnight loans between banks. It anchors the cost of money across the system. A bank's core engine is the net interest margin, or NIM: what it earns on loans minus what it pays for funding, expressed as a percentage of its lending. Funding comes from two places — customer deposits and wholesale debt markets — and the two reprice at very different speeds.
Why rising rates flatter banks first
When the cash rate rises, variable-rate mortgages reprice within weeks; the lending side of the ledger adjusts almost immediately. The funding side is slower and lazier. A meaningful slice of deposits sits in transaction accounts paying at or near nothing, and they keep paying near nothing after the hike. Loans up fast, funding up slow: the margin expands. Early in a hiking cycle, banks enjoy a genuine tailwind.
Then competition goes to work. Savers wake up and shift into term deposits. Rivals fight for borrowers by shaving mortgage rates. Wholesale funding rolls over onto higher costs. The early margin gift gets handed back, basis point by basis point, which is why the margin banks report often peaks well after the cash rate does.
Why falling rates pinch
The reverse move is less symmetric than you'd hope. When rates fall, loan rates fall with them — but a deposit already paying almost nothing cannot fall much further. Economists call this the deposit floor. The lending side drops, the funding side can't follow, and margins compress. This is why an environment of very low rates is quietly hostile to bank profitability even as it helps their borrowers.
The other blade
Margins aren't the whole story: rates set credit quality, too. Rates high enough to widen margins are also rates that strain borrowers, and a margin gained is quickly surrendered if bad-debt charges rise. The market knows this, which is why bank shares tend to price a sweet spot — rates high enough to matter, an economy strong enough to keep loans performing — rather than simply cheering every hike.
So when a bank reports, skip to the margin line and the bad-debt line before anything else. Between them they tell you exactly where in this cycle the bank is standing — and which way the ground is tilting.
General information only — not personal financial advice.