Market rates fall as Central Banks consider cutting rates

It’s amazing the difference a couple of months make. In June we were inundated with speculation that the RBA would raise interest rates in an attempt to support the Aussie Dollar. As a result, borrowers stampeded their lenders in a rush to lock in to 3 and 5 year terms at rates around 6.75 to 7.25%.

Three months down the track and the World economy looks like slowing sufficiently courtesy of SE Asia, Japan, Russia and South America, that the Central Banks of the G7 group of industrialised nations have considered acting in unison to reduce rates to try to stimulate the economy sufficiently to avoid a recession.

Alan Greenspan and his colleagues have declined to act at this stage, but importantly he did not rule out doing so in the future, nor did he rule out the option of various central banks operating independently subject to their own domestic situations.

The stage is therefor set for a reduction in rates irrespective of whether there is an easing in official rates. Bill and bond rates have moved down in anticipation of an official easing, both here and overseas, and a number of lenders have taken advantage of the cheaper funding available to cut their mortgage rates – although this has been restricted to the short end one and two year rates at present.

Variable rates are unlikely to move until the RBA does, but the overall outlook still seems to be no increase in rates in the next six to twelve months, with a distinct possibility of a cut in the next six months provided the US moves first.

Whilst the RBA is not going to raise rates to protect the dollar, it is also unlikely to further weaken it by cutting rates before the US moves.