Australian Mortgage Rates Ahead Of Bank Move

The Reserve Bank (RBA) is meeting in Brisbane today and economists are divided on whether the decision will be to cut rates or keep them on hold at 3.25 per cent. In a poll of 21 analysts conducted by Reuters, 13 economists think the RBA board will keep the cash rate on hold for the second consecutive month - a 45-year low.

The rest expect an easing of between a quarter and half a percentage point but there have been some recent developments that will temper the board's thinking today. The jobs market is drying up. For example there has been a 30 per cent plunge in newspaper job ads over the past two months.

Unemployment is now expected to easily exceed 7 per cent and the global outlook is worsening.

That has some economists tipping a hefty cut of half a percentage point this afternoon.

But the board might still be keen to gauge the impact of the four-percentage-point easing since September. And it will be some time before the full effect of the stimulus efforts become apparent.

The RBA will also be wanting to keep some rate cuts in reserve, to keep its powder dry, until later in the year in case more dramatic action is needed.

Therefore, the argument seems to be whether to act now or later. But most economists agree rates could still be as low as 2 per cent by the end of the year, whatever happens today or in the coming months.

That would be pleasing for a lot of Australian mortgage-holders but those in the cutting camp believe any reduction will have to be hefty to ensure something is passed on to borrowers, many of whom are still recovering from mortgage stress.

Banks still argue that funding costs remain high and that their ability to pass anything on will be limited, although some funding gauges show the cost of sourcing money has been falling significantly in recent months.

Australian banks are also making the most of the reduced competition given the demise of mortgage originators.

The Australian Treasurer, Wayne Swan, weighed in yesterday, urging banks to pass on what they can, given the assistance that has been provided to banks in the midst of the global financial crisis.

By ABC Australia