How low can interest rates go?

Just how far will the Federal Reserve Bank go in lowering interest rates to save the country from a long and painful recession?

One of Australia's biggest banks has predicted that the official interest rate could drop to 3.75 per cent. This would then reduce the average home loan by almost $300 per month.

The Government has promised to do everything in its power to create the environment necessary to support growth and jobs.

Official interest rates have dropped by 2 percentage points to 5.25 per cent in the past three months, but the general consensus is that the Reserve Bank will lower interest rates by another three quarter percent next month. This will probably be followed by another cut of half a percent in February and a further quarter percent reduction in March, to take the cash rate to 3.75 per cent.

If these interest rates materialise then it would further reduce another $287 off monthly repayments on a standard variable loan of $300,000.
While most major banks have not passed on the full benefits of the recent falls in official rates, a dramatic cut in Reserve Banks rate would see a significant drop in variable rates.

The four major banks currently charge about 7.73 percent, but with the predicted falls could bring the standard variable rate down to 6.5 per cent or even lower.

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Published on November 11-th, 2008 in Home Loans
Damon Rasheed is the CEO of Rate Detective, an Australian financial service comparison sites specialising in Life Insurance, Income Protection Insurance and home loans. Damon holds a Master's Degree in Economics from the University of Melbourne and has been involved in many start-up internet businesses.
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