Money market rates tumble

Whether or not banks will cut interest rates for most borrowers next week once the RBA cuts the cash rate became a major talking point over recent days. Exceptionally tight liquidity in interbank markets over the last week (though more so offshore than in Australia) and the flap over whether, and how, to extend aid to US financiers means that credit markets are increasingly priced for a worldwide recession.

In the case of Australia, money market interest rates fell markedly over the last week. The 30-day bank bill rate is now around 7.1 per cent (down a third of a percentage point) and the 90-day bill rate is now a shade less than 7 per cent (down almost half a percentage point). The futures market is now pricing in a cut of 50 basis points in the official cash rate next week (taking the cash rate to 6.50 per cent) with further cuts in each of November and December.

Banks, though, made it clear they will cut borrower’s rates only by "what they can", which many mean by less than any cut in the cash rate. Those cuts are bound to favour those on home loans, while deposit rates may fall selectively. Those with credit cards, personal loans and business overdrafts may have to wait to see a cut in interest rates paid.

Infochoice.com.au