Interest rates are in the news again, but this time it seems that there may be some welcomed relief on the horizon.
All indicators suggest that the Reserve Bank may consider lowering official interest rates, signifying a welcomed relief for people struggling with debt.
Should the Reserve Bank elect to cut the official rate, it will indicate that they feel that inflation is under control and the economy has slowed down to more manageable levels.
It should be noted though that whilst the Reserve Bank can (and probably should) reduce official rates, banks can move rates independently. In fact, in recent times when the RBA elected to keep rates on hold, the banks increased rates placing greater pressure on working Australians.
A cynical person may suggest that the banks are using the current client to improve their market share position. In other words, with non-bank providers struggling to secure finance competitively and write new business, people looking to refinance their property / take out a new mortgage are finding themselves limited in their options.
This probably means the banks are potentially clawing back lost business / market share from when markets were more competitive. On the other hand banks will argue that they are simply passing on the increased cost of borrowings to its customers.
In terms of whether banks should pass on the interest rate cut, it’s accepted universally by economists that a rate cut is not only needed to bring about mortgage relief, but is necessary to prevent a recession.
Taking this into consideration and the expected consumer backlash the banks would receive if rate cuts aren’t passed on, could be enough to force banks into a position where they feel they have no choice but to pass on the rate cut – and for the sake of working Australians, this would be a welcomed relief.
