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AU Experts see more rate cuts coming

Property Here - Thursday, May 09, 2013

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INTEREST rates are tipped to hit a low of 2 per cent by early next year.

Westpac is forecasting a sluggish economy will force the Reserve Bank to follow this week's 25 basis point reduction to 2.75 per cent with another cut in June, followed by two more in the next nine months.

The good news for borrowers was that by yesterday afternoon more than 20 lenders had dropped their mortgage rates, which analysts said reflected an easing of funding pressure for banks.

While it will take days and in some cases weeks for institutions to make their rate cuts effective, latest data from comparison site InfoChoice shows 20 out of 21 lenders passed on the full 25 basis point cut.

InfoChoice's general manager Alastair Schirmer said most lenders had acted faster than usual after an RBA cut.

"I think why they passed on the full rate this time . . . it is probably driven by the fact their costs of funding is definitely lower at the moment,'' he said.

"The lenders' ability to manage their internal funds and their ability to pass on these rates much more effectively at the moment is a result of their costs of funding not being as much.''

AMP Capital Investors chief economist Shane Oliver said the gap between the RBA's cash rate and lenders' standard variable rates had widened, making it easier for the banks to pass on the cuts.

"Until about 18 months ago it was 3.05 per cent, now it's 3.45 per cent,'' he said.

"Combined with an easing in funding conditions and a bit of competitive pressure and public pressure, they've moved a bit faster.''

Analysts say concerns unemployment will rise above 6 per cent later this year as the strong Australian dollar keeps growth below trend are driving the RBA's rate-easing bias.

The prospect of growing budget deficits and low inflation has also left the door open for further rate cuts.

Westpac yesterday revised its outlook to tip weak global and domestic recovery would result in the RBA cutting official interest rates three times by early 2014 - taking rates to a low of 2 per cent, where they would stay throughout next year.

Interest rates in many major economies such as the US, Japan and Europe are already 1 per cent or below.
Westpac chief economist Bill Evans said economic growth would remain ``below trend'' at 2.5 per cent in both 2013 and 2014 as the economy struggled to gain momentum against a backdrop of low consumer confidence, weak property prices and fragile global growth.

"RBA governor Glenn Stevens has left the door open for another move as early as June,'' he said

"We expect that over the course of the next month it will become clear that business intentions are soft, both business and consumer confidence are fragile and credit growth continues to remain subdued. And we have long maintained that from a global growth prospective 2014 will feel like 2012.''

Economists are forecasting the national unemployment level will exceed 6 per cent by the end of the year.

The market consensus for today, however, is that the jobless rate will stay steady at 5.6 per cent for April when the official data is released.

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