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Cloud over home loan rates drop

THE Commonwealth and National Australia banks’ decision to cut home loan rates is something of a surprise given the market conditions.

A number of indicators decide the interest rate level.

The prime factor is the cost of the funds incurred by the banks (this is as much a function of the market perception of where rates are headed to in the future) followed by the inflation rate and the rate of economic growth as measured by the GDP rate.

In the case of the inflation rate, the CPI figure at the end of the September quarter surprised most analysts by being considerably lower than forecast.

The GST was forecast to have caused the CPI to rise considerably.

As it turned out the CPI figure came in quite low.

There were considered to be two reasons for this.

The first was the fact that Professor Alan Fels from the ACCC had demonstrated he would be very vigilant to ensure that the GST would not cause price rises to be substantial.

The second appeared to be a move by producers to hold back price rises for the quarter.

At the time figures indicated that producer prices had risen quite a deal more than had the output prices.

Producers were therefore prepared to take a lower price and absorb some of the price rises.

The question that remains is how long can producers do this?

There seems to be a feeling among economists that the December quarter CPI could experience quite a blow-out as these pent up price rises are released.

If an inflation blowout does occur, then it is possible the Reserve Bank could raise rates to keep a lid on inflation.

Other factors the Reserve heeds are the wages growth figures and the Australian dollar .

Some of the fears about the dollar will have receded as the currency has improved.

The wages growth figures will depend to a great extent on the stance the union movement takes. This will not be known for some time.

If the factors that determine the direction of interest rates and the policy stance that the RBA adopts are in some doubt, why would the Commonwealth and National go to market with a lower rate product?

It would appear that again the non-banking financial institutions have stolen the march on the banks.

It was days ago that Aussie Home Loans proudly announced it was reducing home loan rates.

It would seem this factor as much as any other has stirred the banks into some form of competition.

However if the inflation scenario turns out to be on the high side, there is every possibility the Reserve Bank may need to raise rates and causing the banks to increase theirs.

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