Recent Developments in Interest Rates on Bank Lending

In implementing monetary policy, the Bank uses changes in the overnight interest rate on money market funds – the so-called cash rate – to influence the interest rate structure in the economy more generally, particularly the interest rates charged by intermediaries on loans. These interest rates normally move broadly in line with the cash rate, but in recent years they have fallen by significantly more as competition among intermediaries has seen them cut their interest margins. Whereas the cash rate has fallen by 2.75␣ percentage points since mid␣ 1996, to its previous cyclical low of 1993/94, intermediaries’ interest rates have fallen by as much as 5␣ percentage points, to levels not seen since the early ␣ 1970s (Graph␣ 1). The compression of margins accompanying the easing of monetary policy over the past three␣ years or so has worked to augment the stimulative effect of the policy moves. This article outlines how intermediaries’ interest rates have moved on the major types of lending: housing loans, personal loans and business loans. 196