Friday, November 07, 2008

How low? According to Westpac...

Australian interest rates are set to move dramatically lower with Westpac predicting the lowest official rate since the Reserve Bank began targeting rates by March.

The new Westpac forecast, beefed up in the wake of this week’s Melbourne Cup Day cut is for an official cash rate of 4.00% in March – lower than at any time since the Reserve Bank began making announcing rate targets during the early 1990s recession.

The previous low - 4.25% - was reached in 2001 amid concern that Australia would follow the US and Europe into recession.

Since September the Reserve has cut rates from 7.25% to 5.25% and is expected to cut by another 0.50 points next month.

The Westpac forecast would require cuts totalling 0.75 points during the Bank’s first two board meetings of the year in February and March.

If fully passed on by banks the cuts would slash the standard variable mortgage rate to around 6.35% from its high of 9.6%...

The total saving on a $300,000 mortgage would amount to $644 per month.

Defending the forecast Westpac’s chief economist Bill Evans said the new low point of 4.00% for cash was “not aggressive in the current circumstances”.

“We expect the Fed in the US to cut 0.50 points and Europe to cut 2.00 points. The risks to this forecast are on the downside,” he said.

The Members Equity Bank, owned by industry super funds, trumped the big banks on Thursday by agreeing to pass on all of Reserve Bank’s Melbourne Cup Day 0.75% cut. Its new standard variable mortgage rate will be 7.24%.

Its spokesman Tony Beck said retail rates would only keep falling for as long as the big banks had competition.

“Competitive pressures will determine the extent to which this and future Reserve Bank rate cuts are passed on. Without competition from small banks, the big banks will dominate once again.”

The mortgage broker AFG said its sales jumped 18% in October as record numbers of borrowers refinanced to take advantage of new lower rates.