Major banks pass on rate cut, more on the way

Australia’s four major banks have already passed on the RBA’s 1% interest rate cut to mortgage holders, raising hopes that the banks will also pass on the rate cut to business borrowers.

The RBA cut rates for the fifth consecutive time yesterday, sending the official cash rate to a 40-year low of 3.25%

The combination of last year’s financial turmoil, a severe global downturn and substantial falls in commodity prices has had a significant dampening effect on confidence, and therefore on prospects for growth in demand,” RBA Governor Glenn Stevens said in a statement.

“In these circumstances, the board judged that a further sizable reduction in the cash rate was appropriate, to give further support to demand.”

But that is not likely to be the end of the rate cuts.

JP Morgan economist Helen Kevans expects the RBA to cut rates by a further 50 basis points to 2.75% next month as the economic downturn continues and the economies of Australia’s major trading partners, Japan and China, contract further. JP Morgan expects the rate to stay at 2.75% for most of 2009.

But other economists are tipping the bank could go even lower if unemployment starts to rise, with Access Economics tipping the cash rate will bottom out at 2.5%.