Look for a lower rate

December and January saw more favourable data coming out of the United States and China, but their global outlook remains pretty uncertain, highlighted by the World Bank’s revising downwards its 2012 growth forecast.

Domestically, retail sales have been lacklustre, while consumer and business confidence is running below longer term average levels.

The labour market continues to soften, although recent data have been somewhat confusing. With zero jobs growth last year, I expect inflation in Australia to remain reasonably benign – all of that putting the case for a rate cut.

And then there’s the banks’ cost of funding issue. The banks are clearly under pressure and earlier in the year there was even talk that if the central bank didn’t cut the cash rate then the banks might raise their own rates, while if the RBA did cut, the banks wouldn’t move.

As we have seen before, banks’ not passing on cuts generally causes a bit of a shock and some political controversy, which in itself causes people to sit up and take notice.

As a rule, it’s important to remember that the Reserve Bank still has a hefty influence on the cost of funding for the banks and so investors need to monitor its decisions.

You might have a situation in which some banks refuse to move whereas others do. This opens up marketing opportunities for the smaller banks or even one or two of the larger banks, which can go against the grain and offer their customers a lower rate.

Again, borrowers need to be conscious of what’s going on out there, and that there will still be opportunities for them to get cheaper rates. We might find a new flexibility through which borrowers become more willing to move from lender to lender.

It really comes down to where each bank finds itself, what sort of funding situation they are in – and also what is their market share.

Investors should be prepared to move between lenders – that is the key here.

I’m not saying the market is uncompetitive; I think it is highly competitive.

If, by comparison, you go back a few years and look at the aviation industry, the fares that Ansett and Australian Airlines used to charge respectively were basically the same for flights between the major capital cities.

The departure times were pretty much the same as well.

What has happened now is that they have all basically parted company, the prices vary widely and the departure times are different.

This has created opportunities for travellers who want more flexibility.

If you compare that situation to the mortgage industry, Australians with tighter budgets who need to save on their mortgage will find opportunity in lenders that are willing to drop their rates – provided those borrowers are flexible about switching between banks.

They should also not just consider moving between the big banks, but looking to the smaller lenders as well. This situation might actually provide opportunities for some of the smaller financial institutions. But it’s really up to investors to be a bit more flexible regarding moving around.

Shane Oliver is AMP’s chief economist