Banks will not pass on the full interest rate increases which are forecasted at 1% in 2010, according to Australia’s top macroeconomist Chris Richardson. He said that increasing competition for new customers and lower funding costs would cause major lenders to absorb about 30 basis points of Reserve Bank increases during the second half of 2010.
Futures markets predict the Reserve will raise official interest rates by 1 per cent this year, beginning with a 25 basis point increase in February or March.
If lenders passed on only 70 basis points in 2010, as Mr Richardson expected, homeowners repaying a $300,000 mortgage would save more than $60 a month.
Should banks begin to undercut the Reserve it would bring to an end a near three-year assault on borrowers, a time in which the margin between variable home loan rates and official interest rates has risen from just 1.8 per cent to as much as 3 per cent.
“That’s going to go into reverse,” Mr Richardson said. “We are probably looking at 30 basis points in 2010 and another 30 or 40 points in 2011.”
Leading market economist AMP Capital Investors chief Shane Oliver agreed.
“Banks will be raising rates less than the RBA by year’s end,” he said.
Mr Richardson’s forecast that lenders would undercut by a further 40 basis points in 2011 would potentially save typical home loan customers an additional $80 a month, bringing the total saving to $140 a month.
Mr Richardson anticipated a race between banks to be the first to go lower – I think Westpac might be the first one to do so because they raised their home loan interest rate too much last time in 2009.