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A downward interest rate cycle is now widely anticipated but just how far can brokers expect rates to fall?
Last week Westpac predicted rates to drop by 100 basis points by early 2009; earlier in the month NAB also forecast rates to fall as low as six per cent by next year.
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Forecasts from BIS Shrapnel this week however predicted that while interest rates would come down in coming months they are unlikely to return to the low levels seen earlier in the decade.
Jason Anderson, senior economist with BIS Shrapnel, told Mortgage Business he anticipated the cash rate would fall to 6.75 per cent over the next six or seven months.
“We are expecting a quarter of a percentage cut in the cash rate in September and another quarter of a percent in March 2009,” he said.
But Mr Anderson did not foresee much change to the official cash rate thereafter, leaving rates steady at around 6.75 per cent throughout FY09/10 and most of FY10/11.
“With two interest rate cuts over the coming 12 months, demand for new dwellings should pick up,” he said. “This recovery in dwelling approvals combined with high inflation will not create much scope for further cash rate reductions.”
Nevertheless according to Mr Anderson standard variable rates could come down a further half a per cent as a reduction in international credit costs allowed banks to reverse some of the additional rate rises they’d make in recent months.
“This should see a standard variable rate of around 8.5 per cent, on par with the end of 2007,” he said.
Jennifer Nielsen, chief executive of the LoanMarket Group, said BIS Shrapnel’s forecast seemed a little conservative.
“If fixed rates are the indicator, then a drop of one percentage point in fixed rates over approximately one month gives a good impression of where rates are expected to go,” she said, pointing to banks’ recent reductions in fixed lending rates.
Ms Nielsen said the outlook for lending for the next six months was improving, albeit cautiously.
“As soon as people get comfortable with the idea that rates have peaked and are on the way down, they will return to the market,” she said.
Michael Osborne, head of sales and distribution with The Brokerage, said a reduction in the cash rate next week would “restore some confidence back in the economy” but more would be needed to see lending activity return to normal levels.
Published: 26-08-08
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