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6469.0 - Outcome of the 16th Series Australian Consumer Price Index Review, Dec 2010  
Latest ISSUE Released at 11:30 AM (CANBERRA TIME) 06/12/2010  First Issue
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BACKGROUND

4.1 The Deposit and loan facilities index in the CPI measures changes in the price of banking services provided to households. Households pay for these banking services in two ways. Explicit fees are paid for account keeping services and certain transactions. These are termed direct fees. Banks also earn income by lending funds at a higher rate of interest than they pay on deposits. The difference between the interest paid by borrowers and the interest received by depositors is the total of indirect fees paid for the banking services.

4.2 In order to allocate the indirect fees between depositors and borrowers the concept of a reference rate of interest is utilised. For a borrower, the indirect service charge is given by the interest rate margin (the difference between the interest rate paid by the borrower and the reference rate) multiplied by the balance on the loan. For a depositor, it is the interest rate margin (the difference between the reference rate and the interest rate received by the depositor) multiplied by the deposit account balance. The ABS has adopted the practical approach of setting the reference rate at the mid-point of the average deposit and lending interest rates. A reference rate determined in this way could be interpreted as a proxy for the rate that would be struck in the absence of financial intermediaries by depositors dealing directly with borrowers. A detailed description of the methodology for determining the price of banking services can be found in Appendix 6 of this paper and in Information Paper: Issues to be considered during the 16th series Australian Consumer Price Index (CPI) review (cat. no. 6468.0).

4.3 An equivalent approach for the measurement of financial sector services is adopted in the National Accounts where the term financial intermediation services indirectly measured (FISIM) is used.


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