Why did fixed loan rates fall before the central bank cut?

Because fixed rates are priced off swap rates, and swap rates move on where the market expects the policy rate to go, not on where it is today. When a cut becomes expected, the two- and three-year swap rates fall on the expectation, and banks reprice their fixed loans and term deposits to follow — sometimes weeks before the announcement. On the day itself, fixed rates move only by the part of the decision the market did not expect, which can be nothing at all. The Reserve Bank of New Zealand makes the same point in its own explanation of the Official Cash Rate.

Why hasn't my bank passed on the full rate cut?

Sometimes it has, earlier than you looked: fixed rates often move before the announcement. Where it has not, the reason is usually in the funding. Part of a bank's money costs it nothing or close to nothing — the shareholders' equity, and transaction accounts paying a fraction of a point — and that part cannot fall with the cut. A bank that cuts every loan rate by the full amount gives up margin: on the bank constructed for this page, about 5% of its net interest income once everything has repriced. How much of that it can hold is set by competition, because a bank whose loan rates sit above its rivals' loses the borrowers.

When will a rate cut reach my loan or my term deposit?

It depends on how the rate is set. A floating loan priced off a market base rate moves when that base rate next resets; one priced off the bank's own base rate moves when the bank changes it. A fixed loan does not move until its fixed term ends, and a term deposit not until it matures — at refix or rollover you are offered the rates of that day, which may already carry the cut. A savings or call account can move whenever the bank chooses, by the amount it decides, and that is where competition for deposits does its work.

Do savings rates follow the official cash rate?

In direction, mostly; in size, not always. The share of a market move a bank passes on to a deposit is called its deposit beta, and it differs by account: a bank sets each deposit rate by competition for that money, so the beta on a term deposit, a savings account and a transaction account can all differ, and can change over a cycle. An account already paying close to nothing cannot fall much further. That floor is why a cut can lower a bank's cost of funds by less than the cut itself — 0.39 points for a 0.50 cut on the bank this page constructs.

// HOW A BANK WORKSRATES · FROM THE CENTRAL BANK TO YOUR ACCOUNT

How an Interest Rate Change Reaches You

A central bank moves one rate, and borrowers and savers feel it weeks earlier or months later, rarely by exactly the same amount. Here is the chain it travels, worked on one constructed bank and a half-point cut.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-03

// THE SHORT ANSWER

A central bank's policy rate — New Zealand's Official Cash Rate, or the US target range for the federal funds rate — sets what banks earn and pay overnight. Wholesale and swap rates move on where the market expects that rate to go, so fixed loan and term deposit rates often move before an announcement. Floating loans follow at their next reset, fixed loans at refix, term deposits at rollover, and savings rates by as much as competition requires. On the bank constructed for this page, a half-point cut lowers its cost of borrowed funds by 0.39 points, not 0.50, because some deposits already pay close to nothing.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// WORK THE SUM

Every Groundwork file that is a number to work out — cash conversion, debt service cover, expected loss, risk-weighted assets, the margin on a bank's own book — with the working shown in the senior read. One minute each, no signup.

Open The Number →

// 01 — FROM THE POLICY RATE TO THE MARKET

Every central bank has one rate it sets, and the names differ more than the mechanics. The Reserve Bank of New Zealand sets the Official Cash Rate; the Reserve Bank of Australia, a cash rate target; the Bank of England, Bank Rate; the US Federal Open Market Committee, a target range for the federal funds rate. Each is an overnight rate: what banks earn on the money they leave with the central bank, or what they charge one another to lend it until the next morning.

Almost nobody borrows overnight, so the policy rate reaches a household or a business by a ladder of other rates. The overnight rate anchors what banks pay one another and investors for a month, three months, a year. Those short wholesale rates anchor swap rates: the market's price for exchanging a floating rate for a fixed one over two, three or five years. And the swap rate for a term is the rate a bank hedges a fixed-rate loan of that term against, which makes it the starting point for the fixed rates it offers.

Policy rate · set by the central bank, overnight
Wholesale rates · what banks pay one another and investors, from a month to a year
Swap rates · the market's fixed rate for two, three, five years
The bank's funding cost · deposits and wholesale borrowing, blended
Your rate · floating at reset, fixed at refix, savings when the bank moves, term deposits at rollover

The central bank sets the bottom rung directly. The rungs above it are set in the market, and they move on a different question: not where the policy rate is today, but where traders expect it to be over the term.

// 02 — WHY FIXED RATES MOVE BEFORE THE ANNOUNCEMENT

A two-year swap rate is built largely from where the market expects the overnight rate to be over those two years, which is what the slope of the yield curve shows. When the market comes to expect a cut, the two-year rate falls on the expectation, and the bank's fixed loan and term deposit rates follow it, weeks or months before the central bank acts if the expectation forms early. The Reserve Bank of New Zealand says as much in its own explanation of the Official Cash Rate: because banks plan ahead, they may change mortgage or savings rates before the OCR itself has moved.

So a borrower who watches the announcement for a fall in fixed rates is often watching the wrong day. If the cut was expected, the fixed rate already carries it. If the central bank cuts by less than the market expected, swap rates can rise on the day of a cut, and fixed rates with them. The announcement moves fixed rates only by the part of it that surprised.

Floating rates work the other way round. A floating loan priced off a market base rate moves when that base rate next resets; one priced off the bank's own base rate moves when the bank changes it, which is the bank's decision. Fixed loans and term deposits do not move at all until their term ends. They meet the new rates at refix and at rollover, whatever the market did in between — which is the same choice Fixed vs Floating Rate on a Business Loan works from the borrower's side.

// 03 — A HALF-POINT CUT, AND WHAT YOU SEE

Take a bank constructed for this page — the same constructed bank the other pages in this order use. It holds US$8.0bn of loans: US$4.0bn of business loans, all floating for this example, and US$4.0bn of home loans, fixed for terms that end at different times over the next few years. They are funded by US$7.0bn of customer deposits, US$2.0bn borrowed from investors and US$1.0bn of the shareholders' own money, which pays no interest. Its cost of borrowed funds, blended across all of it, is 3.09%:

transaction accounts 2,000 × 0.25% = 5

savings and call 2,000 × 3.0% = 60

term deposits 3,000 × 4.0% = 120

bonds sold to investors 1,500 × 4.8% = 72

short-term borrowing 500 × 4.2% = 21

interest paid = US$278m

cost of borrowed funds 278 ÷ 9,000 = 3.09%

Now the central bank cuts its policy rate by half a point, and the bank passes the cut on in full wherever a rate can move. A business with a US$2m floating loan sees its base rate fall by half a point at the next reset. Its margin — the part the bank sets for that borrower's risk — does not change. A household with US$200,000 in a call account sees its rate fall from 3.0% to 2.5%:

Borrower, US$2m floating 2,000,000 × 0.50% = US$10,000 a year less interest

(about US$833 a month)

Saver, US$200,000 on call 200,000 × 0.50% = US$1,000 a year less interest

(US$6,000 at 3.0% becomes US$5,000 at 2.5%)

A saver with a term deposit sees nothing until the deposit matures. At rollover it is offered the new rate for the term, which — like a fixed loan rate — may have fallen weeks before the announcement, on the same expectation. A household refixing a home loan meets the same thing from the other side of the table.

// 04 — WHAT THE CUT DOES TO THE BANK

The bank's own sums come in two stages. In the first year, only part of each side reprices. The floating business loans fall at once, and so do the US$300m of reserves the bank holds at the central bank — in New Zealand and the United Kingdom the policy rate is itself the rate paid on that money. The home loans and the bank's bonds are fixed and wait for their terms to end. On the funding side, savings and short-term borrowing reprice at once, and term deposits as they roll over: spread evenly through the year, that is half a year at the new rate on average.

First year:

floating business loans 4,000 × 0.50% = −20.0

reserves 300 × 0.50% = −1.5

interest earned = −US$21.5m

savings and call 2,000 × 0.50% = +10.0

term deposits 3,000 × 0.50% × ½ = +7.5

short-term borrowing 500 × 0.50% = +2.5

transaction accounts at 0.25%, left alone = 0

interest saved = +US$20.0m

net interest income, first year = −US$1.5m

Barely a dent. The sum that matters is the second one, once every rate that can move has moved — the home loans refixed, the bonds replaced, the last term deposit rolled:

Once everything has repriced:

interest-earning assets 9,500 × 0.50% = −US$47.5m

interest-bearing funding 7,000 × 0.50% = +US$35.0m (all but transaction accounts)

net interest income 250 − 47.5 + 35 = US$237.5m

net interest margin 237.5 ÷ 9,500 = 2.50%, from 2.63%

cost of borrowed funds 243 ÷ 9,000 = 2.70%, from 3.09%: down 0.39, not 0.50

Two pieces of the bank's funding cannot follow the cut. The US$1.0bn of shareholders' equity pays no interest at all. The US$2.0bn in transaction accounts pays 0.25%, which could fall by a quarter of a point at most before the bank was charging its customers to hold their money, and this bank leaves it where it is. Every dollar of assets those two fund earns half a point less and costs nothing less. The share of a market move a bank passes on to a deposit is its deposit beta — here one on savings and term deposits, nought on transaction accounts — and it is the number that turns a balance sheet into a forecast.

So a cut passed on in full wherever a rate can move costs this bank US$12.5m a year once everything has repriced, 5% of its net interest income, and the same half-point rise, passed on in full to borrowers and not to transaction accounts, would add the same US$12.5m. Which side reprices first, and how fast depositors ask for more, is the repricing gap, worked on Net Interest Margin and the Repricing Gap.

DEPOSIT BETA, WHAT THEY HEAR → · DEPOSITS THAT STAY PUT, THE BOARD →

// 05 — WHY A BANK DOES NOT ALWAYS PASS ON THE FULL MOVE

The question is usually asked as an accusation and answered as an excuse. The arithmetic above is neither. A bank funded partly by money that pays nothing, or close to it, loses margin when rates fall and gains it when they rise, if every other rate moves by the full amount and that money cannot. A bank that passes a cut on in full to borrowers, while three-tenths of its funding — the equity and the transaction accounts — cannot fall with it, gives up part of the margin that pays its costs and its loan losses. One that passes a rise on in full to borrowers, and less of it to savers, widens its margin by the same mechanism.

How much of either a bank actually keeps is decided by the market rather than by the arithmetic. The Reserve Bank of Australia notes that deposit and lending rates do not always move in step with the policy rate, because other things move market rates and because competition among banks varies. The Reserve Bank of New Zealand lists what banks weigh when they set their own rates: the risk of the loan, their day-to-day costs, competition, the exchange rate, and where they think the OCR is going next. A bank that holds a loan rate its competitors have cut loses the borrowers; one that pays savers less than its competitors loses the deposits. In a rising market, money can move out of transaction accounts into savings and term deposits that pay closer to the market rate, and as it does, a margin that widened early in the rise narrows again.

Two other things move a bank's rates with no change in policy at all. Its cost of wholesale funding rises and falls with what investors ask of banks in general, or of that bank. And the margin on a particular loan moves with that borrower's risk, which is a different conversation — Why Your Bank Repriced Your Loan is that one. When a rate seems not to have followed the central bank, look first at whether it moved earlier, on the expectation; whether it is fixed and waiting for its term to end; and whether what moved was the base rate or the margin.

// STANDARDS THIS SITS BESIDE

The recognised ground this page sits beside. Each was opened and checked when cited; none is a source for the framework itself.

Reserve Bank of New Zealand, The official cash rate (OCR) — Common questions about the OCR — The OCR is the rate banks earn on their deposits with the Reserve Bank; because banks plan ahead, they may change mortgage or savings rates before the OCR itself moves; fixed-rate loans do not change until their term ends; and banks set their own rates on the loan's risk, their costs, competition, the exchange rate and where they think the OCR is going next — sections 01, 02 and 05.
Reserve Bank of New Zealand, Monetary Policy Statement, February 2026 — chapter 3, Global economy and financial markets: Domestic financial conditions — Swap rates largely reflect market participants' expectations for the OCR, commercial banks hedge the interest rate risk of fixed-term mortgages in the swap market, and higher wholesale rates transmit to retail rates — the swap rung in section 01 and fixed rates moving ahead of the decision in section 02.
Reserve Bank of Australia, About Monetary Policy — The Monetary Policy Board sets a target for the cash rate, the rate charged on overnight loans between commercial banks; because of other influences on market rates and changing competition among banks, deposit and lending rates do not always move in lockstep with it — sections 01 and 05.
Basel Committee on Banking Supervision, Interest rate risk in the banking book (April 2016) — Principle 5, paragraphs 45(iv) and 46 — Deposits with no repricing date need behavioural assumptions: core deposits are those unlikely to reprice even when rates change significantly, and how far a deposit rate responds depends on the level of rates, the gap to market rates and competition — the deposit beta and the floor in section 04.

// QUESTIONS BORROWERS AND SAVERS ASK

Why did fixed loan rates fall before the central bank cut?: Because fixed rates are priced off swap rates, and swap rates move on where the market expects the policy rate to go, not on where it is today. When a cut becomes expected, the two- and three-year swap rates fall on the expectation, and banks reprice their fixed loans and term deposits to follow — sometimes weeks before the announcement. On the day itself, fixed rates move only by the part of the decision the market did not expect, which can be nothing at all. The Reserve Bank of New Zealand makes the same point in its own explanation of the Official Cash Rate.
Why hasn't my bank passed on the full rate cut?: Sometimes it has, earlier than you looked: fixed rates often move before the announcement. Where it has not, the reason is usually in the funding. Part of a bank's money costs it nothing or close to nothing — the shareholders' equity, and transaction accounts paying a fraction of a point — and that part cannot fall with the cut. A bank that cuts every loan rate by the full amount gives up margin: on the bank constructed for this page, about 5% of its net interest income once everything has repriced. How much of that it can hold is set by competition, because a bank whose loan rates sit above its rivals' loses the borrowers.
When will a rate cut reach my loan or my term deposit?: It depends on how the rate is set. A floating loan priced off a market base rate moves when that base rate next resets; one priced off the bank's own base rate moves when the bank changes it. A fixed loan does not move until its fixed term ends, and a term deposit not until it matures — at refix or rollover you are offered the rates of that day, which may already carry the cut. A savings or call account can move whenever the bank chooses, by the amount it decides, and that is where competition for deposits does its work.
Do savings rates follow the official cash rate?: In direction, mostly; in size, not always. The share of a market move a bank passes on to a deposit is called its deposit beta, and it differs by account: a bank sets each deposit rate by competition for that money, so the beta on a term deposit, a savings account and a transaction account can all differ, and can change over a cycle. An account already paying close to nothing cannot fall much further. That floor is why a cut can lower a bank's cost of funds by less than the cut itself — 0.39 points for a 0.50 cut on the bank this page constructs.

// WHICH SIDE MOVES FIRST

Net Interest Margin and the Repricing Gap works the timing this page leaves out: the assets and funding that reset within a year, the gap between them, and the deposit beta that decides whether a rate rise helps a bank or hurts it.

Read Net Interest Margin and the Repricing Gap →

THE IN-TRAY · ONE MINUTE