Messy markets put floor under deposit rates

A most disruptive week on financial markets probably reinforces the now long-held view that another cut in official cash rates is likely in early October. Interest rate futures are priced to suggest that there may be another two more cuts in the cash rate this year, in each of November and December, and then another in March 2009. These may not readily translate into lower interest rates on home loans and other loans as banks seek to protect their profit margins.

The second wave of the credit crunch (which claimed Lehman Brothers and forced a financial rescue of insurer AIG) means that actual money market rates offshore increased over the week. In Australia the rise in money market rates was more muted but still clear, with bank bill yields at their highest levels in a month, and back to where they were before investors worked out in mid August that the RBA would cut rates in September.

Most interest rate changes over the last week applied to fixed rate home loans, with rates falling. Deposit rates, which were starting to ease in recent weeks, might start to prove sticky now, with term deposit rates likely to start rising again as banks scramble to lock in retail funding at a time that wholesale markets are looking very expensive.