Will the banks cut interest rates again?

Analysts are predicting that the banks will ignore passing on any further interest rate cuts to their customers, as banks try to protect their billion-dollar profits.

Key banking analysts believe that mortgage rates have bottomed at our major banks or are about to bottom, despite the fact of further cuts to the Reserve Banks cash rate.

Despite the likelihood that the Reserve Bank will cut interest rates as low as 2 per cent later this year, banks are probably going sit on their hands and absorb the savings to shield themselves from spiraling costs of funding.

The analysts have further commented that the banks have reached bottom, which will prevent them from passing on further cuts, unless Australia's healthy economy sinks at a greater speed than expected.

The Four major banks ignored the decision by the Reserve Bank last week to lower its cash rate by 25 basis points. The Commonwealth Bank, ANZ and Westpac passed on a 10 basis points to their mortgage customers, while the NAB kept the entire savings for themselves.

The Commonwealth Bank currently has the lowest variable rate at 5.64 per cent, followed by the NAB with 5.74 per cent, and Westpac and ANZ both at 5.81 per cent.

An analyst from JP Morgan has stated that the time was approaching when these rates would not be able to drop any further, and that as interest rates got lower it becomes extremely difficult for banks to pass them on. Due to the high cost of funding, a floor is created as to how much they can pass on and the banks are pretty much there.

Martin North Fujitsu's consulting director also believes that the banks won't pass on any more future rate cuts. At the launch of the JP Morgan-Fujitsu Mortgage Report, Mr. North stated that the banks had to act now to ration credit.

Another analyst felt it was ludicrous for customers to keep demanding rate cuts from their banks. If the RBA were not to cut rates for a few months it would be highly unlikely the banks would be able to pass on any further cuts to customers.

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Published on April 4-th, 2009 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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