RBA expected to cut interest rates in October

After three months of holding the official cash rate steady at 3.50%, the Reserve Bank of Australia is expected to cut interest rates by 25 basis points when it meets this coming Tuesday, 2 October, 2012.

Banks pre-empting Reserve Bank

In anticipation of this move, many banks have recently announced cuts to their fixed rate home loans, competing fiercely with each other to secure new customers.

Over the past two months, 59 of the 75 home loan providers in Mozo's database have dropped their fixed home loan rates. This includes two of the Big 4 banks: Commonwealth and Westpac, with the latter this week dropping its three-year fixed rate by 30 basis points to 5.54%, making it the cheapest Big 4 fixed rate option on the market.

What's expected?

Most analysts are predicting a 25 basis point cut in October, but the Reserve Bank is widely tipped to further slash rates by 50 points over the next year, 25 of these by the end of 2012.

Westpac Chief Economist Bill Evans has predicted October's cut will be followed up immediately by another 25 point reduction in November.

Solomon Lew, former RBA board member and chairman of Premier Investments, has added his voice to those advocating for and predicting further cuts, warning that if rates are not reduced by at least 50 basis points by Christmas, retailers and small businesses will suffer.

On the flip side, Commonwealth Bank senior economist John Peters, told the Sydney Morning Herald that if he had to choose a month, he'd choose November as the month that the RBA would drop rates.

The bottom line: what does all this mean for borrowers?

Consider the following:

On one hand it might seem like a fab time to snap up a fixed rate home loan, with banks slashing rates all over the shop, but the Reserve Bank's rates are only predicted to continue to drop. This, of course, leaves open the possibility of further rate cuts from the banks, including the Big 4.

On the other hand, however, assuming the RBA does continue to cut rates, the banks are under no obligation to follow suit. Certainly, banks will be under more pressure to reduce their rates in the wake of the predicted Reserve Bank decision, but as we all know all too well, the chances of any such cuts being passed on in full are pretty negligible.

In terms of variable rate home loans, let's do some maths. ANZ is offering a variable rate of 6.80%. In the (very unlikely) event of a 25 point RBA rate cut being passed on in full by ANZ, it still falls very short of ME Bank's market-leading 5.39% three year fixed rate.

The bottom line? Now is a good time to lock in a fixed-rate home loan, but with talk of back-to-back cuts, it is completely possible that you'll be able to get a better deal in six months, or even a year. Shop around, be cautious and get informed.

And remember, if the RBA does cut rates on Tuesday, we'll be keeping track of the movements and publishing our naughty or nice table so that you can find out which banks pass on the cut in full and those that don't.

Any good news for savers?

Because we're optimists here at Mozo, we're gonna go ahead and say that the savings glass is very much half full.

If the Reserve Bank acts as predicted and cuts rates, you can pretty much guarantee that savings accounts and term deposit rates will follow suit.

But if you act super-soon (as in, before the RBA's decision), you can lock your money away in a term deposit with a fab rate. UBank is looking the best for one year term deposits, sitting pretty at 5.21%. If you're looking for a longer-term commitment, Teachers Mutual Bank is offering 5.10% for a three year deal, and RaboDirect is packing a punch with 5.40% for five years.

Keep in mind that on-call savings accounts are another great option for all you savy savers and currently, the rates offered on these accounts are substantially better than those offered on term deposits. The RAMS Saver account is leading the pack at 5.75%, which is over 50 basis points higher than UBank's one year term deposit account.

Read last month's Reserve Bank interest rates update.

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