Which4U – Finance Blog

Consumers might have been forgiven for thinking that a timely boost was set to come their way in time for Christmas.

It is widely predicted that central interest rates, which had remained untouched since April 2009, will fall for the second consecutive month when the Federal Bank’s committee convenes next week for the final time in 2011.

But the untimely downgrading of Australian banks by credit ratings agencies this week has put a new complexion on the immediate forecast for bank funding, irrespective of whether a central rate cut is announced or not. Consumers are set to lose out when they may have expected to benefit.

Downgrading

Standard & Poor’s have downgraded a number of major banks worldwide, including Barclays, HSBC, Goldman Sachs, UBS in Switzerland and the Bank of America. In Australia, the Commonwealth Bank, ANZ, National Australia Bank and Westpac all fell by one grade to AA[-], the agency’s fourth-highest rating. Macquarie Group was cut by two levels to BBB, a grade which anticipates a level of risk from adverse economic conditions.

What these reductions do is heighten insecurity for banks to lend to one another. This, in turn, raises the cost of lending as banks insure themselves from that elevated level of risk.

Such costs will no doubt be absorbed by consumers through less competitive savings and loan rates. A central interest rate cut may prove welcome only insofar as it prevents loan rates from rising.

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Are we being taken for fools on the essential banking products that we choose?

An interesting parallel has emerged between Australia and the UK in the world of personal finance: an enquiry into value for money on fee-driven banking products.

Australia: Credit Card Fees

About half of all Australian credit card holders are getting no value from their credit card rewards because of fees, it was reported last week. In most cases, annual fees are outweighing the value of rewards such as air-miles, and only very high levels of spending – roughly $60,000 per year – could make such benefits count.

Contrast this with the average annual Australian credit card spend of $17,000, which itself is artificially heightened by very high spenders, and we see the degree to which fees outstrip potential rewards.

A monthly spend of $1,000 could see fees exceed potential benefits by as much as a third in value even before interest is factored in.

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