Big banks cut fixed rates in response to world turmoil

A WEEK ago experts were warning interest rates were going up. Now lenders are cutting them.

Sydney-based banks – Commonwealth, Westpac and St George – led the pack yesterday reducing their interest rates on fixed-term loans.

The fixed-term rates offered by these lenders are now well below the average discount variable rates which rise and fall with movements in the Reserve Bank’s official cash rate.

Variable rates are favoured by the vast majority of home borrowers but the head of retail banking services at Commonwealth Bank, Ross McEwan, said yesterday many borrowers wanted certainty with their home loan repayments and that fixed loans offered “that peace of mind”.

The cuts to fixed-loan rates follow a dramatic shift in global economic sentiment over the past few weeks. Growing concern about the euro zone debt crisis and the possibility of a double dip recession in the US triggered turmoil on international financial markets.

The decision by ratings agency Standard & Poor’s to downgrade the sovereign credit rating of the United States to AA+ from AAA has contributed to the volatility.

The interest rates on long-term bonds have also fallen sharply, making it cheaper for lenders to fund mortgages. This has helped banks offer lower interest rates for fixed-term home loans.

However, despite the stiff competition in the home lending market, figures released by the Bureau of Statistics yesterday showed the number of new loans to owner occupiers was stagnant in June.

Australia’s biggest home lender, Commonwealth Bank, cut the interest rates on its fixed home loans by between 0.25 and 0.6 percentage points yesterday. Westpac reduced its three-year fixed rate by 0.2 of a percentage point while the Westpac-owned St George Bank cut both its two- and three-year fixed home loan rates by 0.2 of a percentage point. ING Direct also reduced its fixed home loan rates.

Some three-year fixed mortgage interest rates are now more than 0.5 of a percentage point lower than the basic variable mortgage interest rates offered by the big banks.

But money market investors are betting that official interest rates – and therefore variable rate mortgages – will fall soon. The bill futures traded on local financial markets that predict the future movement of the Reserve Bank’s cash rate are pricing in a 0.5 of a percentage point cut next month and a further 1 percentage point of cuts by March next year.

Despite this, many market economists believe the Reserve Bank will leave rates unchanged until global economic and financial conditions becomes clearer. Last week, the Reserve Bank Governor, Glenn Stevens, said “the acute sense of uncertainty in global financial markets over recent weeks” had been a factor in leaving rates on hold.

The relative health of the economy was underscored yesterday when the National Australia Bank revealed earnings of $1.4 billion for the June quarter.

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