Finance advice

Big rate cut needed

By webmaster

The Reserve Bank of Australia (RBA) will need to reduce the official interest rate by at least half a percentage point next month to pressure the major banks into passing on reductions to customers, according to Loan Market.

Loan Market corporate spokesman Paul Smith says the big banks have all indicated they might not be able to match the expected 25 basis points cut to the cash rate in February.

"The RBA will have to go hard with at least a 50 basis points reduction at their next meeting and the latest official figures showing a lower than expected 3.1 per cent annual inflation rate and prospects of rising unemployment support the need for a cut," Mr Smith says.

"The big four banks have all stated that rising funding costs as a result of the European debt crisis will impact on their bottom line and make a rate reduction difficult.

"But the RBA can apply more pressure on the banks and ensure borrowers are not left in the lurch by making a bigger than expected cut in the cash rate of at least 50 basis points."

If the RBA does lower its rate by half a percentage point when the board meets on 7 February, it will be the largest single reduction since February, 2009, when the central bank applied a 1 per cent cut to lower the official rate to 3.25 per cent.

According to Mr Smith, the RBA's recent back-to-back 25 basis point reductions in November and December have bolstered consumer confidence.

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