US rate cut holds mixed fortunes for Australian rates

This week has seen signs that the global financial markets might be returning to normal following the shakeout caused by the sub-prime lending crisis in the US. If this is the case, there are mixed fortunes for Australian borrowers and their home loan interest rates. There are two factors playing on interest rates currently, generally pulling in opposite directions. As one risk threatening higher rates recedes, the other rises.

The risk of smaller lenders here having to raise interest rates for borrowers (because the global credit crunch is lifting their costs of raising finance) on variable loans may now start to recede but we are not totally out of the woods yet. No lender wants to be seen to be raising rates when its competitors aren’t. Most lenders are not expected to raise rates, and those that do by small margins.

The risk of all lenders having to raise interest rates because the Reserve Bank increases official interest rates has, however, returned now that the global credit crunch is settling down. There is no real chance the RBA will lift rates as soon as its October meeting this Tuesday. But the significant 0.5 percentage point cut in interest rates by the US Federal Reserve has served to settle nervous world financial markets very nicely and reduced the risk that the US will go into recession, hitting world growth.

This means Australia’s strong economic growth is less threatened and likely to continue, a situation that already has the RBA concerned over inflation. It is possible therefore that we will see an interest rate rise late this year or early next. The soonest a 0.25 per cent hike could come is early November, following the release of the all-important quarterly inflation figures in late October, although the chances don’t appear high at this stage.