Will the banks pass on the rate drops?
Monday August 11, 2008
Many people are looking forward to a possible interest rate reduction by the RBA, but there are concerns that the banks will not respond in kind. An important element to consider here is that the RBA has expressed concerns in the past that it may still not be time to reduce the official interest rate. The seeming reluctance of banks to reduce their own interest rates if an official reduction was announced may actually be the only thing convincing the RBA that it may be reasonable to make a reduction.
Looking at the intention of the RBA in previous interest rate rises, the Reserve Bank of Australia has consistently stated that it intended the banks to become more conservative. If all the banks were to instantly drop rates as soon as any official cuts were made, this could discourage the RBA from making further cuts. While the economy does appear to be slowing down at an incredible rate, the psychological effect of an official interest rate cut, coupled with government posturing to ensure the banks follow suit, may be enough to increase spending once more. People who think that they are looking at more favourable economic times may begin spending again even before their own situation has been relieved.
In the event of an interest rate cut, some of the banks will likely reduce their rates, but it is unlikely all of them will immediately. That could be good or bad in the long term.
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