Interest Rate Updates

RBA minutes released yesterday shows that Reserve Bank of Australia was considering between 50 and 75 basis points cut on the official interest rates on Melbourne's Cup day.

"Key factors in members' consideration of the policy decision were the continuing poor conditions in financial markets, the significant deterioration in the outlook for the world economy, with implications for Australia, and the likelihood that inflation in Australia would fall over the year ahead."

The minutes also disclosed that RBA wanted to get rates down to a "neutral" level (neither slowing the economy nor encouraging people to go out and borrow) quickly.

What's next? Taking into consideration that RBA is not scheduled to meet in January, interest rates are tipped to drop by another 75 or 100 basis points after December meeting. Unless RBA decide to hold a January meeting as they did in 1990 during the last recession.

You can bet on footy, you can bet on horses and now you can bet on interest rates!

Centrebet says it is the first bookmaker in Australasia to field bets on the official Reserve Bank of Australia (RBA) announcements on interest rates.

As of today the odds are:

DOWN BY 0.01% - 0.25%              8.00
DOWN BY 0.26% - 0.50%              2.30
DOWN BY 0.51% - 0.75%              2.50
DOWN BY 0.76% - 1.0%                3.50
DOWN BY MORE THAN 1.0%       6.50
STAY THE SAME                             15.00
ANY INCREASE                              101.00

So according to Centrebet 0.50% cut is a slight favourite to 0.75% cut. But 1.00% cut is also possible as odds were down to 3.50 from 7.00 recently. 

As predicted the European Central Bank (ECB), Bank of England, Swiss National Bank and Danish central bank cut interest rates on November 6. Most shocking cut was 1.50% by Bank of England. That is serious allegation that UK heading to a recession.

The following table is reflecting the movement of official policy rates in various countries during 2008:

Next scheduled meetings of Central Banks:

• Japan - 21 November,
• Australia - 2 December,
• New Zealand - 4 December,
• Europe - 5 December,
• UK - 5 December,
• Canada - 10 December,
• USA - 17 December

Compare what home loan interest rates are offered by Australian lenders.

Reserve Bank of Australia (RBA) reduced official interest rate by surprising 0.75%, but Commonwealth Bank's almost instant announcement of 0.58% cut for it's standard variable rate was non the less of surprise.

It seems CBA tried the old "market leader trick" - be the first into the market and set the rate for the rest of the oligopoly to follow. We will see if this trick will work this time.

Update: Other big banks followed the suit and didn't pass full rate cut to it's clients. Check the latest rates updates in our Home loan interest rate cuts - November 2008 article.

A speech delivered yesterday by Mr Ric Battellino (Deputy Governor) to the 7th ITSA Bankruptcy Congress in Sydney contained three key messages:

• Australia's economic outlook is very uncertain;
• inflation is still important and may limit the RBA's ability to cut rates and;
• Australia's house prices are not as dire as in the US

In the conclusion the deputy RBA chief said the Australian economy was likely to grow at a slower pace in the next two years:

"The next couple of years will be noticeably more subdued than the past five. We should not be surprised by this as the income and wealth generated over the past five years were simply extraordinary."

The Federal Reserve slashed interest rates by 0.5 percent to four-year lows today. Official interest rate in the US is 1% now.

China cut its interest rate to 6.66% from 6.93%.

Norway's central bank cut rates by half a percentage point to 4.75%.

Japan may cut rates on Friday and the European Central Bank and Britain are expected to add to the monetary easing next week as authorities remain fearful that the worst financial crisis in 80 years will cause a long global recession.

This let us to expect 0.75% rate cut by RBA on Melbourne Cup day.

Reserve Bank of New Zealand has slashed its Official Cash Rate (OCR) by an unprecedented one percentage point in reaction to global financial turmoil and sluggish growth. Now Official Cash Rate in New Zaland is 6.5 percent.

This cut is the biggest cut since the central bank adopted the official cash rate (OCR) in March 1999, and RBNZ hinted more cuts could follow. The move could help boost New Zealand's slagging economy, which officially slipped into recession this year.

RBA minutes were released yesterday and it seems that increased risks to Australia's economy and signs that inflation will cool gave the central bank a "strong economic case'' for this month's 1 percentage point interest-rate cut, the biggest since a recession in 1992.

Banks' funding costs was another reason for a such big cut. Funding costs had risen by about 20-25 basis points relative to relevant benchmarks and RBA was afraid that any reduction in interest rates that banks announced on loans to customers would most likely be less than the change in the cash rate by a similar margin.

The minutes also showed that concern over fallout from the deepening global credit freeze outweighed the threat that a larger-than-expected rate reduction would erode market confidence. "Members concluded that despite the possibility of a short-term reaction, stronger action would help sentiment over time.''

And though RBA said "Members did not regard this unusually large adjustment as establishing a pattern for future monetary policy decisions" most economists tip that RBA will cut official interest rates on November meeting as well.

Most economists are sure the Reserve Bank of Australia (RBA) will cut interest rates at least by 50 basis points at the next month's meeting. Most likely it will be 75 basis point cut, but RBA may surprise us one more time and cut interest rates by 100 basis points.

Bank funding costs fell this week after the federal government promised to guarantee deposits in Australian-owned banks, building societies and credit unions for the next three years. Existing stability in money markets would make lenders to give home borrowers the full benefits of official interest rate cut this time.

This would lead to a big drop in standard variable home loan rates and big savings for home owners. So don't even think about fixing you mortgage rates yet.

The Reserve Bank of Australia cut interest rates by 100 basis points today. The bigger-than-expected reduction in official rates to 6 per cent was the largest cut in rates by the Reserve Bank since May 1992.

Whilst it is vital to remain strong in the current unprecedented financial environment, the banks really need to show commitment to their clients and pass on the vast majority of the rate cut, if not all of it. Australian families desperately need further rate relief. Any rate cute by the banks that is less than 0.85% will be viewed as unfairly increasing their profit margin at the expense of Australian Families.

Speculations are over. Reserve Bank of Australia cut the official interest rate for the first time in nearly seven years, reducing it by 0.25 of a percentage point, to 7% this afternoon.

Immediately after the RBA announced its decision Australia's big banks and non-bank lenders followed by cutting their variable lending rates. This is also shut up the speculations "which bank is going to be a bastard". All lenders passed at least full 25 basis point to consumers. St George cut its standard variable home loan rate by 30 basis points to 9.37%.

The tone of the RBA statement suggested the central bank was more likely to cut rates again in November, rather than October.

ANZ and NAB has promised to lower home loan rates if the Reserve Bank decides to cut official interest rates at its next board meeting.

And though NAB commitment to reduce rates in full is tied with 25 basis points, ANZ's pledge is not tied to just a 25 basis point reduction, potentially exposing the bank to passing on a higher cut from the central bank.

The other major banks, Westpac and Commonwealth Bank of Australia, have so far refused to guarantee they will pass in full any cut to the official cash rate which is at 12 month high - 7.25 per cent.

It is interesting to observe banks actions in a different scenarios - when official rate is up, banks increase their rates almost immediately and even more than official rise. But when official rate is going down, all banks are reluctant to cut rates suggesting that there are a lot more factors to consider...

The minutes of the Reserve Bank's August board meeting was released yesterday and have all but confirmed market expectations that there will be an interest rate cut next month.

Board members were conscious that financial conditions getting tighter and less restrictive conditions could soon be called for, otherwise the risk of a deeper and more persistent slowing in the economy would increase. But RBA's "language" in the minutes is not strong enough to suggest they are heading towards a 50 basis point cut next month. So most likely interest rates will be cut by 25 basis points and couple times in a row.

ANZ has cut its fixed mortgage interest rates by between 11 basis points and 50 basis points to 8.99%. The decision by ANZ to cut its fixed rates - but not its variable rates - comes as financial markets factor in a likely cut in official interest rates next month.

It seems with this move ANZ seeks to show a "good will" for RBA and the public and have excuses not changing or even increasing it's standard variable rate in the future when official rates will be cut by RBA.

Australian Bureau of Statistics (ABS) data last week showed only 11.7 per cent of new mortgages approved in June were at a fixed rate, the lowest market share since October 2005. That was a big fall from March when fixed rate loans commanded 23.9 per cent of all new housing finance commitments. Most economists also agree that official interest rates reached their peak and should go down in the near future. So reducing fixed interested rates is a good move to get "good publicity" without sacrifying any profits.

Taking into consideration the current economic situation in Australia most economists agree that there is no question about whether or not official interest rates will be cut in near future. Merely the question should be: how much will rates be cut by the  RBA - 25 or 50 basis points? The RBA is likely to start with a 0.5 percentage point cut like it did in previous years. Both interest rate cut programs in 2001 and 1996 started with a 0.5 percentage point cut. It would bring the official rate down from its 12-year peak of 7.25 per cent to 6.75 per cent.

Another question however is  - will the private banks follow the RBA and pass on official rate cuts to their customers?

Today as expected the Reserve Bank of Australia has left interest rates unchanged at 7.25 per cent.

The cash rate is at a 12 year high and was certainly expected to stay that way with 19 economists surveyed by AAP expecting the RBA to leave the cash rate steady.

The Reserve Bank has not cut rates since December 2001 and the Banks Governor Stevens indicated in a statement that while the board felt it was appropriate to keep rates steady this month, relief could be in sight.

The RBA raised its cash rate four times between August last year and March to curb price pressures this certainly seems to of worked from the latest retail spending figures which showed the lowest in six years clearly showing that the economy is slowing.

Growth in retail trade fell by a seasonally adjusted 1.0 per cent in June after a surprise 0.7 per cent increase in May, the Australian Bureau of Statistics said. Consumers spent just over $20 billion in June, to post retail's weakest growth in six years.

The RBA's monthly credit report released today also indicates that 12-year high interest rates are curbing demand for credit. Total credit grew just 0.4 per cent in June.

Another two points to mark slowdown in economic growth, backing speculation the Reserve Bank of Australia (RBA) may be in position to cut interest rates early next year or even at the end of this year.

Reserve Bank of New Zealand has cut official interest rates by a quarter of one per cent, to eight per cent - the first drop in five years.

The bank says the cut is justified by a rapidly slowing New Zealand economy, despite strong inflationary pressures which is expected around 5% in the September quarter.

The Reserve Bank governor, Alan Bollard, says further interest rate falls are likely.

Maybe Reserve Bank of Australia will follow it's counterpart's example soon?

Australian Bureau of Statistics reported yesterday that Consumer Price Index (CPI) climbed 4.5% in the year to June. It's the worst inflation numbers since the introduction of the GST. In the three months to June, inflation rose 1.5 % - the highest quarterly rise in 17 years.

The bigger than expected inflation figures indicate that the Reserve Bank of Australia is likely to take its time before giving us any rate cuts. But it is considered there's almost "no chance" of interest rates rising again this year as RBA faces the challenge of managing a steeper economic slowdown than anticipated.

A cut in official interest rates by the end of the year is a real prospect if tomorrow's consumer price index (CPI) data for the June quarter surprise on the low side. 

The producer price index (PPI) at the final stage of production rose only 1 per cent in the June quarter, for an annual rise of 4.7 per cent, the Australian Bureau of Statistics said yesterday.

The result was well below market expectations of a 1.6 per cent rise in the quarter and an annual rate of 5.3 per cent and it seems the June quarter CPI data could also be lower than currently expected.

But if Reserve Bank starts cutting official interest rates within a few months and trading banks don’t cut their rates with the same enthusiasm they have shown for raising them over the past 12 months, what happens then?

Westpac joined the interest rate changes and increased its standard variable rate by 14 basis points to 9.61 per cent this week. Now all major banks in Australia have raised their interest rates despite the fact the RBA left official rates unchanged at 7.25%. Banks are blaming higher costs of funding for these additional raises.

Below you can find a table with the results of the latest increases and how much more it would cost you with an average loan of $300,000 for 30 years under standard variable rate.

 However banks still have various products with better rates and you can compare them here at Rate Detective.

The minutes from the central bank's monetary policy meeting two weeks ago have been released.

"On balance, while members remained concerned about the current rate of inflation and the uncertainties about the outlook, the increasing signs that demand was slowing suggested that the existing policy setting was exerting the appropriate degree of restraint,'' the minutes said.

High petrol prices, significant decline in growth for both household and business credit, interest rates rises by banks independently of RBA - all these factors show that economy is slowing down and taking pressure from RBA to rise official interest rates again. The only concern is inflation as it sits at 4.2% and is well above of RBA's comfort zone (2-3%). But it seems RBA are ready to cope with it for a while so rate rise is unlikely when RBA meets on August.

As expected, remaining banks followed St.George example and increased home loan interest rates by 0.15 - 0.20 per cent.

ANZ announced 15 basis point rate rise late Friday afternoon. ANZ’s new standard variable rate of 9.62 per cent came into effect today.

Today National Australia Bank has become the latest bank to turn the screws on homeowners, hiking its standard variable rate by 15 basis points to 9.61 per cent.

Meanwhile, AMP Bank also said it would increase its standard variable home loan interest rate for existing customers by 0.20 per cent, to 9.67 per cent. The standard variable rate for new customers will increase by 0.11 per cent to 9.67 per cent per annum. The changes take effect this week.

In less than a week after St George lifted its standard variable interest rate by 20 basis points, 2 other major banks, BankWest and The Commonwealth Bank, did exactly the same.

Bankwest has increased its standard variable home loan rate by 0.2 per cent, taking its variable home loan rate to 9.55 per cent.

Commonwealth Bank of Australia has raised its variable home loan interest rates by 14 percentage points, taking its standard variable rate home loan from 9.44 per cent per annum to 9.58 per cent per annum and its basic variable home loan will go from 8.93 per cent to 9.07 per cent.

Raises came despite Reserve Bank of Australia left official interest rates on hold at 7.25%. All banks blame higher cost of funds following the global credit crunch for the increases. If that's the case we should see remaining banks to follow the example and raise their interest rates between 10 and 20 basis points.

It's become more and more crucial to compare home loans first before applying for any home loan.

Borrowers should expect more interest rate rises despite the Reserve Bank of Australia indicating rates are on hold.

Since late last year individual lenders have pushed up their interest rates on top of the "official'' increases by the RBA and it seems lenders are not going to stop doing this.

St George Bank put its mortgage rates up by 0.20% again on Friday and there is likely to be more to come, regardless of the Reserve Bank's decisions.

This is because the finance and banking industry ultimately has the last say on interest rates. Although the Reserve Bank sets an official rate, it is up to each lender to decide what it will charge. And despite the Reserve Bank indicating last week it thinks consumer demand is coming under control, the banks and lenders have other issues to factor in which could still see rates go up again.

The European Central Bank (ECB) raised its main interest rate by a quarter of a point to a seven-year high point of 4.25 percent to choke record inflation as economies slow down.

The following table is reflecting the movement of official policy rates in various countries during 2008:

Next scheduled meetings of Central Banks:

Compare what home loan interest rates are offered by Australian lenders.

The Reserve Bank of Australia has today announced that it will leave the official cash rate on hold at 7.25 per cent. This move was what all major economists were expecting. Economists now say that further signs that the economy is slowing is shown in the unexpected fall in the job market, which has allowed the central bank to sit tight on rates. The RBA raised rates four times between August 2007 and March 2008 as underlying inflation soared to record 16 year high.

After 2 days of deliberation the US Federal Reserve left its interest rate unchanged at 2.00%. It's first break since US Fed began a series of aggressive interest rates cuts last September. Increased expectations to inflation was the main reason for such decision.

Such news is a relief for Reserve Bank of Australia (RBA). If other central banks are getting serious about inflation, that might make it easier for RBA to fight inflation as much of it is coming from overseas. The RBA holds its monthly board meeting on Tuesday and most economists are sure interest rates remain unchanged in Australia as well.

Interest rates are not going down any time soon and it is likely that one further interest rate hike may be necessary towards the end of the year thanks to the iron ore and coking coal price rises. The price hikes highlighted the need for the Reserve Bank of Australia to keep interest rates tight and to continue working to make room in the wider economy for mining-related demand growth. That means slowing other parts of the economy, including retail sales, the housing sector and credit growth with tight monetary policy settings.

The RBA will also battle against the stimulatory effects of $7 billion in income tax cuts, which will be delivered from July 1.

Despite continuing signs of a slowing domestic economy, and the first drop in employment since October 2006, 2 of Australia's big 4 banks still think an August interest rate rise is likely.

ANZ and the Commonwealth Bank are predicting an August rate rise when the consumer price index is released on July 23. Both banks believe that it will show another spike in underlying inflation in the June quarter and RBA will be forced to increase interest rates. 

The National Australia Bank is less convinced that another rate rise is needed and is predicting rate cuts next year as the economy slows further, while Westpac sees rates on hold until 2010.

On the other hand the biennial report of the South Australian Centre for Economic Studies predicts the Reserve Bank will have to lift official rates by 0.25 per cent twice before inflation will be controlled in Australia. Report says employment growth and demand are much stronger than the Reserve Bank had expected and further raising interest rates to counter the effects of the mining boom in Australia.

Everybody is concerned about negative impact raising interest rates have on mortgage, but not everybody sees the other side of the coin. Interest rates on savings accounts have not been this high in Australia in more than 10 years! So there has never been a better time to dive into the "saving mode" and make interest rate rises work for you.

Open a high interest savings account (for example, BankWest TeleNet Saver which has best rates at the moment) and set up an automatic deposit from your main account. Depending on your pay frequency it can be done fortnightly or monthly. Then work a little bit on your monthly budget (cut unnecessary expenses, prioritise, shop around, save on petrol, etc.) and at the end of the day you will notice it's easy to make your money grow.

Official interest rates remain unchanged for couple of months in other countries too. Let's take a look how our rates compare to the rest of the world:

Economy is slowing down and another interest rise is unlikely in coming months. But according to RBA minutes published yesterday there are 2 major factors to pay close attention to – oil prices and wage or price rises.

The RBA highlighted that any outbreak of wage or price rises would spark a review of the bank's current on-hold policy.

The RBA said higher petrol prices could add about quarter of a percentage point to inflation over each of the June and September quarters - potentially pushing the core inflation reading close to 5 per cent. And some economists believe that RBA will raise interest rate to 7.5 per cent on August when RBA gets June quarter CPI (Consumer Price Index) data in late July if that’s the case.

For homeowners, the interest rate cycle could be nearing an end as the RBA emphasised the current interest rate of 7.25% could be cooling the economy by the degree needed to harness inflation.

Fixed interest rates are becoming unpopular, as borrowers believe that the Reserve Bank only has one or two more interest rates rises if any.

Although fixed rate loans are currently offering lower interest rates than variable loans, borrowers are wary of being locked into a relatively high rate if the RBA starts lowering rates in the next year or two. Fixed rate loans made up 17.5 per cent of all home loans taken out in April, down from 23.9 per cent the previous month.

The Reserve Bank of Australia (RBA) is responsible for formulating and implementing monetary policy. The Board usually meets eleven times each year, on the first Tuesday of the month except in January. For each meeting the Bank's staff prepare a detailed account of developments in the Australian and international economies, and in domestic and international financial markets. The Reserve Bank Board's explanations of its monetary policy decisions are announced in a media release, which is distributed through electronic news services and published on the Reserve Bank's website at 2.30 pm on the day of each Board meeting. Any change to the cash rate (interest rate) target will take effect from the following day.

Below you find the chart of recent changes in official interest rates (click on image to enlarge).

The latest jobs data will certainly take some pressure off wage growth, Which the Reserve Bank of Australia has been worried about now for some time Ms Kevans said, adding she expects the RBA to leave rates on hold at 7.25 per cent.

Many Economists believe that the latest impact of job losses on both full and part time workers underscored the pace of the RBA’s orchestrated slowdown.

Prime Minister Kevin Rudd warned of a long fight against inflation as a result the Reserve Bank gave a warning that it will lift interest rates again soon if wages or prices race away. Still most economists agree that it's unlikely interest rates will be raised on the next RBA meeting. As at 11 June, the SFE 30 Day Interbank Cash Rate Futures July 2008 contract was trading at 92.725, indicative of a 10% expectation that the RBA will change the Target Cash Rate by at least 25 basis points from 7.25% to 7.50% on the 2nd of July 2008 (i.e., compared to a 90% expectation of no rate change).

The RBA today announced that it will keep official rates at 7.25%. Central bank governor Glenn Stevens, in statement accompanying the rate decision, said the board's assessment was that demand growth would moderate this year.

The labour market conditions up until now have remained strong, indicators of household spending have recorded subdued outcomes over recent months, and credit expansion to both households and businesses has slowed down dramaticially.

The minutes from the Reserve Bank meeting on the 6th of May have been released. It is likely we will see another rise in the interest rate in the coming months. For more detail about the outcome of the meeting see our article RBA Dilemma. 

The latest interest rate rise from the Reserve Bank of Australia saw the cash rate move +0.25 from 7% to 7.25% on the 5th of May. This is the twelth consecutive rise since 2002 with the last fall being in December, 2001.