Bulletin – March Quarter 2016 Developments in Banks' Funding Costs and Lending Rates Abstract

This article updates previous Reserve Bank research on how developments in the composition and pricing of banks' funding have affected their overall cost of funds and influenced lending rates. Major banks' outstanding funding costs fell notably in 2015, following two reductions in the cash rate. The spread between the major banks' outstanding funding costs and the cash rate also narrowed over 2015. This was due to lower costs of deposits and a more favourable mix of deposit funding, as well as lower wholesale funding costs. Lending rates declined in the first half of 2015, reflecting changes in the cash rate and competition for lending, before lending rates increased for housing in the second half of the year; business lending rates are at historically low levels.

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