Money market rates remain high

A traumatic week in global financial markets rubbed out earlier expectations of a further decline in retail interest rates. Interest rate futures are still priced to reflect a cut of a quarter of a percentage point in the official cash rate (from 7.0 per cent now) by the Reserve Bank in each of the months October and November.

Money market rates are telling a different story. Thirty day bank bills at the end of the week were priced at a yield of 7.40 per cent while 90-day banks bills were only fractionally lower.

The stress on international credit markets worsened this week as policy makers and bankers in the US debated the term of any financial bailout. The proposed plan to buy toxic assets was too late to save Washington Mutual which collapsed today, and is now the worst US bank failure in history.

These events means that banks in Australia must be looking again at lifting deposit interest rates in order to match money market rates. This in turn means that there will be no more cuts in borrowing rates, at least on loans with a variable rate, in the short term.

There is talk of even more aggressive cuts in the RBA cash rate between now and the end of the year in order to bring down the actual rates paid by borrowers.

Infochoice.com.au