Will interest rates drop further tomorrow?

If economists’ predictions are anything to go by, we are heading towards further interest rate cuts, possibly as early as tomorrow.

Investment banks, including JP Morgan, Goldman Sachs and UBS, are tipping the Reserve Bank of Australia will cut the cash rate by a further 25 basis points to 4.25 percent at its next board meeting on 6 December. There are also expectations of more rate cuts in the first quarter of 2012.

The Reserve Bank cut interest rates for the first time in more than two years on 1 November, with a 25 basis point adjustment to 4.50 percent. Current cash rate levels remain above the record low of 3 percent in 2009, however.

Robert Simeon, director of Richardson & Wrench Mosman in Sydney, said declining consumer confidence is resonating through the property markets, with falling house prices across the nation.

“No doubt the Reserve Bank of Australia (RBA) is monitoring this closely and my school of thought is that the cash rate will be further reduced by 0.25 percent when it meets [in December], with another drop in February 2012,” Simeon said. The RBA does not meet in January.

RateCity chief executive Damian Smith is also confident an interest rate cut is on the cards, but not necessarily this month, he said. “The important thing for borrowers is that there are two RBA board meetings, in December and February, and it is reasonably likely that one of those two meetings will lead to a rate cut,” he said.

Shane Oliver, head economist at AMP Capital, said it would be too risky for the RBA to wait until February to cut rates. “Waiting two months until the next RBA Board meeting in February could prove to be a big mistake given the deteriorating situation in Europe and the threat that banks may raise their lending rates and tighten lending standards,” he said.

Whenever the cut comes, lenders are expected to pass on the saving to consumers, Smith added. “Despite the banks positioning themselves to say they won’t pass on the cut, we expect they will.

“One hundred percent of variable home loans in Australia passed on some or all of the cut last month, and the majority passed on all of it. The market is too competitive right now to not pass it on.”

For homeowners eager to pay their mortgage faster, falling interest rates are an ideal scenario if they keep their repayments at their current level. That way more of your money goes towards the principal rather than the interest. 

While there is no formal data available, RateCity predicts half of Australians with variable rate mortgages are currently paying more than the minimum amount. “It’s very sensible behaviour by consumers and we think that’s the right thing to do,” Smith said.

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