Westpac Bank stunned borrowers by announcing that interest rate “should fall” in the next 12 months. Are there any chances it will happen? Are other banks also agreeing with this statement?
Until last week, every major bank and lender – including Westpac – has been on record as forecasting a series of rate hikes later this year.
The Reserve Bank initially planned to raise the cash rates in July. Economists changed their mind and moved the prediction to August, then November.
Westpac was the first major bank in Australia to predict that a rate reduction will take place instead of a rise over the next year.
The odds of a rate cut were increasing at the beginning of last week. This comes after concerns about the European sovereign debt crisis. Global traders became concerned about another credit crunch, and started pricing in RBA’s lower official rates in Australia. Evidently Westpac followed their lead.
‘‘We are now of the view that the direction of market pricing is probably correct and the next rate move in Australia will be down rather than up,’’ says Westpac chief economist Dr Bill Evans.
‘‘Interest rates are too high in Australia, given the state of the non-mining sectors of the domestic economy, and a downward adjustment is required to avert a damaging round of contraction.”
To prevent harming an already fragile economy, he believes the RBA will decrease the interest rates four more times in 2012.

Evans stated that although the rate reduction will most likely be caused by offshore activity, Evans doesn’t believe it is a one-off event.

“We anticipate rate cuts that will start with 25 basis point in December 2011, and go through 2012, totalling 100 bases points before we reach a period of steady rates in 2013. The rate adjustment will likely be the same as in previous easing cycles.

All three Australian banks including Commonwealth Bank and NAB are expected to raise rates by the RBA at least once.
Bloomberg News polled 21 economists in order to determine the median estimate by Bloomberg News that the RBA would increase its official cash rate 25% to 5% for November. Brad Gibson, chief rate strategist at ING Investment Management believes the RBA “is nearing the end its tightening cycles”.
“Given the deteriorating global situation, it is increasingly difficult to see an RBA hike in the months ahead – though a higher cash rate in Australia in the medium term is still our central case.”
According to credit markets, they believe there is a 33% chance of a rate cut when the RBA meets in August. Credit Suisse predicts that the cash rates will drop from 4.75% to 4.25% in the next 12 month.
With all of these predictions and forecasts, no one has a crystal ball to know exactly what will happen – so what’s a borrower to do?
If you can financially ride out the variable rate storm, it seems that it pays to keep your mortgage on a flexible rate, so if Westpac’s predictions do come true, you’ll benefit from lower repayments. Rate reductions are not always certain because economic news changes constantly.
“The question [is]The RBA may have decided to cut rates. Either something goes catastrophically wrong in Europe, in which case they’ll cut by 100 basis points, or the domestic economy continues to weaken,” says Sally Auld, an interest rate strategist at JPMorgan Chase & Co, adding, “We really don’t know what’s going to happen one day to the next in Europe.”