Call for RBA to slash rates next month

THE RBA may need to cut interest rates by 50bp next month to make an impression on mortgage rates, an economist says.

Call for RBA to slash rates next month

THE Reserve Bank of Australia (RBA) may need to cut its official cash rate by a half percentage point next month to make an impression on mortgage rates, an economist at a leading investment bank says.

The RBA raised the prospect of lower interest rates last week, and has the opportunity to flesh out its policy thinking when it releases its quarterly policy statement tomorrow.

The Federal Government continues to put pressure on retail banks to pass on in full any cut the central bank may make, but the banks say they cannot guarantee they will follow suit.

"Obviously, where interest rates are is a matter for the Reserve Bank and it acts independently, and we don't speculate on what the Reserve Bank might do about interest rates,'' Acting Prime Minister Julia Gillard told ABC Television.

"But if interest rates were to fall, then we expect banks to pass that on to mortgage holders.''

Ms Gillard said the government would in November put in place a scheme that would make it easier for people to change banks.

"If you think your bank is giving you a bad deal, then shop around and get a better deal,'' she said.

The RBA has raised its cash rate by half a percentage point this year to curb inflation pressures, while retail banks have increased their lending rates by a full percentage point because of their own increased borrowing costs due to the global credit crunch.

Financial markets are fully pricing in a quarter percentage point rate cut when the RBA board next meets on September, and a small risk that it will cut by a bigger cut.

"If the Reserve Bank of Australia wants to reduce mortgage interest rates, rather than simply prevent further increases in mortgage rates, then it needs to act decisively and reduce the cash rate by 50 basis points in September,'' Macquarie Bank senior economist Brian Redican said.

He said a clear example of a more timid rate cut just happened in New Zealand where its central bank lowered its official rate by a quarter percentage point.

The standard variable mortgage rate there remains unchanged at 10.9 per cent, even though deposit rates fell from 8.46 per cent to 8.14 per cent.

"Of course, it could be argued that if the RBA did cut interest rates by 25 basis points in September but mortgage rates only fell modestly, then the RBA could always follow this up with another 25 basis point cut in October,'' Mr Redican said.

But he said there is a danger that if the RBA eases policy, but nothing happens, then confidence in the central bank  "could wane''.

Assistant Treasurer Chris Bowen dismissed suggestions that traditional retail banks were facing less competition on home loans from non-bank lenders.

The global credit crunch has hit non-bank lenders hard because of their increased borrowing costs, and data shows that retail banks are increasing their market share of the home lending market.

"I think it is a little dramatic to say there won't be any non-bank lenders,'' Mr Bowen told Channel 10.

"They certainly have had some financing issues in recent months, but I don't think there is any evidence non-bank lenders are going to disappear completely and they will continue to provide some competition."