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Monday, June 4, 2012

Borrowers pay almost double the Reserve Bank's rate

HAVING misread the state of the global economy in the first few months of the year, stubbornly keeping interest rates higher than necessary, the Reserve Bank faces the choice today of not whether to cut again, but by how much.

Last month, the central bank took a machete to interest rates, slicing a larger-than-expected 50 basis points from the official cash rate in a tacit admission it was making up for lost ground.

Undoubtedly, there will be some argument around the table this morning to hold fast, to wait for the impact of last month's super cut to flow through the economy.
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After all, official unemployment numbers indicate an economy in rude good health, our economic growth is still the envy of the developed world, public sector debt is minimal, the inflation bogey has subsided and the dollar has been edging lower, providing some breathing space for our oxygen-starved domestic industries.

Some economists believe the RBA this afternoon will cut rates by 50 points in a bid to get ahead of the global downturn.

About $130 billion has been wiped off Australian shares in just over a month, fuelled by the deepening European debt crisis.

All gains this year have been erased, with the benchmark ASX 200 index dropping 2 per cent yesterday to below 4000 points for the first time since November.

Banks blame Europe's financial woes for raising the cost of the money they borrow overseas, plus the fact they are paying more on customer deposits than they were in the financial crisis, when the cash rate/mortgage rate gap was 2.75 percentage points.

The last time borrowers were paying so much more than the RBA cash rate was in September 1994.

Research group and comparison website RateCity said yesterday that higher deposit rates were playing a key role as banks tried to reduce their reliance on overseas money, a tactic that was benefiting savers but hurting borrowers.

RateCity consumer advocate Michelle Hutchison said their borrowing costs had increased because they were paying more for deposits, which were at a record high.

"They have had to counteract that with charging more for home loans," she said.

"They may not all be justified but there are some reasons. We can see there is pressure on the banks."

Choice spokeswoman Ingrid Just said all RBA cuts should be passed on in full to borrowers, and homeowners unhappy with their loans should switch lenders.

"The banks are hugely profitable and given our economic conditions it is only fair they pass on any rate cut in full," she said.

But Australian Bankers Association chief executive Steven Munchenberg said the link between the official RBA rate and mortgage rates had been broken.
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