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25bp rate cut a start but more needed to spark market revival

Staff Reporter 4 minute read

September is widely tipped to see the first official rate cut since December 2001 and indications are that more could follow.

In the RBA’s quarterly Statement on Monetary Policy, released this week, the central bank once again signalled that rate cuts are likely to come sooner rather than later – despite the fact that inflation is now expected to hit five per cent by December.

The market has already priced a reduction in interest rates as soon as next month; some even expect as many as three 25 basis point cuts before the end of the year.

Iain Forbes, director of sales and marketing at Australian First Mortgage (AFM), said that while a reduction in the cash rate would be welcomed his fear was that the banks could put profits before borrowers.

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“My major concern, in today’s market, is whether the major financial institutions will pass any rate reduction on,” he said.

With banks having now shown they will move outside the RBA’s cycle, Gerald Foley, managing director of National Mortgage Brokers, said it was possible the banks might take a more “opportunistic view” on a cash rate cut – but he hoped they wouldn’t.

“I think the banks have had enough time to reprice their lending rates so I hope they will be quick to pass on any cut in interest rates,” he said.

Even if a rate cut was passed on, according to Lisa Montgomery, head of consumer advocacy at Resi Home Loans, it would take more to trigger a significant increase in borrower activity.

“Borrowers are really feeling the pinch at the moment, not just from their mortgage commitments but other credit commitments and the rising costs of food and fuel,” she said.

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“The brakes are still on. Volumes are low across the board and people are very cautious about buying and selling.”

Mr Forbes said that while a rate reduction of 0.25 per cent would be welcomed by existing mortgage holders, he agreed this would not be enough to stimulate broader borrower activity.

“We will need several rate cuts and a lot more confidence in the economy before we see any real pick up in activity,” he said.

Published: 12-08-08

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25bp rate cut a start but more needed to spark market revival
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