There is no market price here. The price is the gap between what the central bank sets and what the institution passes on - and that gap widens and narrows in a pattern that is not symmetric.
11 min read · Level 1
There is an argument that the gap between a legacy savings rate and a current offer is simply the price of inattention, and that people who pay it have chosen convenience over money. I think that is mostly a comfortable story, and the honest version is less flattering to the arrangement. The gap persists because it is designed to be hard to notice: nothing is deducted, no statement shows a charge, the rate is disclosed in a place nobody visits, and the institution that knows exactly how far behind your account has fallen has no duty to mention it and every reason not to. That is not the price of convenience. It is a price extracted from people for not auditing a product they were told was the simple one. What makes it worth being blunt about is the size relative to the effort. Nowhere else in this curriculum is there a return available that requires no judgement, no forecast, no risk and no expertise - only an afternoon. The people who capture it are not better investors; they treated cash as a position rather than as a place where money waits. And the reason I would put this lesson ahead of almost anything else a new investor could do is that it works in the only direction that is certain: the gap is visible today, it does not depend on being right about anything, and closing it cannot go wrong.
Every other asset class in this curriculum has a price that somebody arrives at: an auction, a negotiation, an appraisal, a net asset value. Cash has none. A deposit is always worth its balance, and it never trades.
So the pricing question has to be asked differently. What is being priced is not the deposit - it is the rate, and the rate is set by the institution with reference to a benchmark it does not control: the central bank's policy rate. The deposit rate you are offered is that benchmark minus whatever the institution keeps.
Policy rate 4.00% Rate offered on an instant-access account 1.20% --------------------------------------------------- Spread retained by the institution 2.80 percentage points
Pass-through: 1.20 / 4.00 = 30.0% of the policy rate reaches the saver
That spread is the price of this product, and it is paid in income you never see rather than in a fee you are charged. It does not appear on any statement, because nothing was deducted - a smaller number was simply credited.
What that spread costs is arithmetic. On 25,000:
At 4.00% 1,000 a year At 1.20% 300 a year --------------------------- Forgone 700 a year, which is 70.0% of the 1,000
Now the part that turns this from an observation into a rule. Pass-through is not symmetric. Follow the same account through a policy-rate cycle:
Policy rate rises 4.00% to 5.00% account moves 1.20% to 1.60% Passed on: 0.40 of 1.00 point = 40.0%
Policy rate falls 5.00% back to 4.00% account moves 1.60% to 1.20% Passed on: 1.00 of 1.00 point = 100.0%
The policy rate finished exactly where it started and so did the account - and in the year it was raised, the saver received 1.60% rather than the 2.20% a full pass-through would have given. On 25,000 that single year of asymmetry is 0.60 of a percentage point, which is 150.
Nothing improper has happened. Nobody promised a full pass-through in either direction. The pattern exists because the incentives point that way and because almost nobody moves.
Because that asymmetry is the whole reason cash needs managing at all, and it explains something otherwise puzzling: why the gap between the best available rate and the typical rate is so wide, and why it persists.
In a market where the product is identical - a guaranteed deposit is a guaranteed deposit - competition should drive prices together. It does not, and the reason is that the product is identical but the customers are not. Some will move for 0.50 of a percentage point and some will not move for 3.00 points, and an institution that must offer one rate to everybody would have to choose between winning the first group and keeping the margin on the second.
So institutions do not offer one rate. They offer several: a competitive one on a new account to attract the people who compare, and a much lower one on the long-standing accounts held by people who do not. Both rates are published, both are honest, and the difference between them is available to anybody who looks.
Which makes this the rare case where the entire return advantage available in an asset class is capturable by administrative action rather than by judgement. Nothing is being forecast. There is no view to be right about. The better rate is on a public page and moving to it is a form and a transfer.
One consequence is worth stating plainly, because it reframes what "safe" means. A saver who leaves 25,000 at 1.20% while 4.00% is available has not lost any capital, has taken no risk, and has been down 700 a year, every year. Over ten years on an unchanged balance that is 7,000 of opportunity cost, without a single day of volatility and without anything happening that anybody would describe as a loss. The capital was never at risk and the return was.
The second consequence concerns fixed terms. When policy rates are expected to fall, fixed-term products often stop being offered at attractive levels well before variable accounts are cut, because the institution is pricing the future rather than the present. So the window in which a good fixed rate is available tends to close first and quietly, and a saver waiting for certainty about the direction of rates finds the product they were waiting to buy has already been repriced.
None of which is a case for trying to outguess rates. It is a case for the opposite: knowing the spread you are currently being charged, and acting on the gap that is visible today rather than on the direction nobody knows.
Educational, not personalised financial advice. Nothing in the Investor Academy is a recommendation to buy, sell or hold anything — what is right for you depends on your own circumstances and the rules where you live.
Three accounts at one institution, all published on the same day, all covered by the same guarantee.
Account Rate On 25,000 Long-standing instant access 1.20% 300 a year Current instant-access offer 3.90% 975 a year Two-year fixed term 4.15% 1,037.50 a year
The policy rate is 4.00%. The gap between the first and the second is 2.70 percentage points, which is 675 a year on 25,000, and it exists between two products of the same institution with the same protection and the same access. The only difference is when the account was opened.
Over five years on an unchanged balance, ignoring compounding for clarity, that is 3,375 - and the action required to have had it was opening an account.
The third line is a different question and should not be compared with the second on rate. It pays 0.25 of a percentage point more, which is 62.50 a year, in exchange for two years of unavailability. Whether that is worth it depends entirely on whether the money has a date, which is lesson two's sorting exercise. A saver comparing 4.15% with 3.90% and choosing the larger number has made a two-year liquidity decision on the basis of 62.50.
Now the same three accounts a year later, after the policy rate has fallen to 3.00%.
Long-standing instant access 0.90% 225 a year Current instant-access offer 2.85% 712.50 a year Two-year fixed term taken last year, still 1,037.50 a year
The long-standing account passed on 0.30 of the 1.00 point cut, which is 30.0%, so it fell less than the offer rate did - and it remains 1.95 percentage points behind. Falling by less from a much lower base is not a benefit, and it is exactly the shape that lets a holder conclude their account is holding up well.
The fixed term, meanwhile, is now paying more than either variable account. That is not a vindication of fixing; it is the same trade paying off this time, and it would have looked entirely different had rates risen.
Comparing your rate against your own past rate rather than against what is currently available. A rate that has fallen less than the policy rate is not holding up well if it started 2.70 points behind. The comparison that matters is with today's alternatives, not with last year's version of the same account.
Treating the spread as a fee that would show up somewhere. Nothing is deducted; a smaller amount is credited. It appears on no statement and in no cost comparison, which is precisely why it persists at sizes no explicit fee could survive.
Choosing a fixed term because the rate is highest. On the table above the two-year product paid 62.50 a year more than the instant-access offer in exchange for two years of unavailability. That is a liquidity decision priced at 62.50, and nobody who framed it that way would make it carelessly.
Waiting for clarity about the direction of rates. Nobody has it, fixed-term pricing moves before variable rates do, and the gap available today between your account and the best offer is knowable now. Acting on the visible gap is not a forecast.
Assuming a big institution's rate must be competitive. Size is evidence about balance sheets, not about the rate on your particular account, and the largest institutions frequently carry the widest gap between their legacy accounts and their current offers.
Your account's rate divided by the current policy rate. At 1.20% against a 4.00% policy rate that is 30.0%. It takes one division and it converts a vague sense that your rate is low into a figure you can compare with the same figure for the best offer you can find.
Percentage points do not motivate anybody. On 25,000 a gap of 2.70 points is 675 a year, and the same gap on 100,000 is 2,700. Writing the currency amount is what makes the twenty minutes of paperwork feel proportionate, because in percentage terms it never does.
The largest gap is frequently between two accounts at the same bank rather than between two banks, and moving internally is usually the fastest route with the least administration. Look at what they are advertising to new customers and compare it with what you hold.
No prompt is coming. Institutions are not obliged to tell you that a better account of their own pays more, and they do not. Twice a year is enough to keep the gap from widening quietly, and the review itself is a rate table and one comparison.
Whenever the central bank's policy rate has moved, at least twice a year regardless, before committing to any fixed term, and whenever a balance has been sitting in the same account for more than a year.
Do not use this lesson to try to time rate movements - the whole point is that the gap available today is knowable and the direction is not - and do not chase a marginally better rate across institutions so often that the guarantee mapping from lesson one stops being something you can keep track of.
Institutions routinely operate a competitive account for new customers alongside legacy accounts paying substantially less, with identical protection and identical access. Both rates are public and the difference is frequently larger than any fee the same customer would tolerate on any other product. The arrangement survives because moving requires the holder to notice something that no event draws attention to: the balance never falls, no charge appears, and the correspondence announcing a rate change reads like administration rather than news. The customers who move are not the ones with the most money or the most knowledge - they are the ones for whom something happened to prompt a look.
Compare your account against your own bank's current offer first. The widest gap is often inside one institution, and that move is the easiest one available.
Fixed-term deposit rates are priced from expectations about the future rather than from the policy rate today, so they tend to be reduced or withdrawn ahead of any move in variable accounts. Savers who decide to wait until the direction of rates is clearer commonly find that the products they were waiting to buy repriced during the waiting, while the variable account they were sitting in had not yet changed at all - creating the impression that nothing had happened when in fact the only thing they could have acted on was the thing that moved. It is not a reason to guess at rate direction. It is a reason to act on a gap that is visible rather than on one that might appear.
A fixed rate on offer today is an actual offer; a better one later is a hope. If money genuinely has a date attached, decide on the offer in front of you.
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