00:00 You probably think that when the Reserve Bank lifted interest rates last week, it actually
00:05 set them, that it told the banks what to charge.
00:09 But that's not quite true.
00:11 What it did at 2.30 on Melbourne Cup Day was to announce, without the details, that it
00:16 would charge the banks an extra 0.25% interest when it lends to them overnight, and it would
00:21 pay the banks an extra 0.25% interest on their deposits with the Reserve Bank, which are
00:28 called exchange settlement balances.
00:31 And that's basically it.
00:33 The RBA used to make money from that deal, but a big change happened during the pandemic.
00:38 The deposits that the banks hold at the RBA, in green, have blown out from around $25 billion
00:43 before COVID to $362.5 billion now.
00:49 An older chart shows it a bit more clearly, and also what's happened to the amounts that
00:53 the banks borrow from the RBA, which are called cash market transactions.
00:58 The reason those two lines flipped in 2020 was that the Reserve Bank bought a whole lot
01:02 of stuff from the banks and gave them cash in return so they could lend to businesses
01:06 and households and keep the economy going.
01:09 But the economy turned out to be okay, and they didn't need all the cash, so they deposited
01:14 most of it back with the Reserve Bank, where it earns interest at the cash rate minus 0.1%,
01:21 and they don't need to borrow overnight anymore.
01:24 Last Tuesday, the interest on those exchange settlement deposits went from 4%, or $14.5
01:29 billion, to 4.25%, or $15.4 billion, nearly a billion dollars more.
01:36 Meanwhile, the extra money the Reserve Bank makes from lending to the banks has evaporated.
01:41 So that rate hike means that not only do we pay more to the banks for our mortgages, but
01:46 the Reserve Bank that we own also forks out an extra billion dollars to them as well.
01:51 It goes straight to their bottom line.
01:52 [ Silence ]
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