Borrowers could pay the price if AAA rating is downgraded

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While opinion is growing that August’s board meeting of the Reserve Bank of Australia (RBA) will end with a further cut to the official cash rate, Australian borrowers could miss out on any benefit thanks in large part to the ongoing confusion about the makeup of the next federal government.

After the RBA left the cash rate at 1.75% following its board meeting earlier this week, many commentators believe the central bank will be forced into a cut next month with soon to be released inflation figures likely to fall outside where the RBA would like.

“The chances of interest rates moving lower in August remain high; June quarter inflation data will be available late this month, providing a timely read on consumer prices prior to the August RBA meeting,” CoreLogic research head Tim Lawless said.

“It is likely that the inflation figures will come in well below the RBA target range of 2-3%.  If that is the case, there is a high likelihood that interest rates will move lower next month,” Lawless said.

But as the Australian economy is continually impacted by the lack of a result from last weekend’s federal election speculation is mounting that Australia’s AAA credit rating could be downgraded.

Shane Oliver, head of investment strategy and economics and chief economist at AMP Capital, said the likely downgraded would have a “muted” impact on everyday Australians, it could result in higher mortgage rates.

“In theory it should mean higher interest rates as foreigners demand a higher yield on Federal debt and this flows through to state debt, banks, corporates and potentially to out of cycle mortgage rate hikes for households,” Dr Oliver said.

While Dr Oliver believes the election uncertainty could cause a domino effect resulting in higher interest rates, others believe the current political climate may help borrowers.

John Kolenda, head of mortgage broking network 1300HomeLoan, believes Australia’s banks have the desire to raise interest rates, but would be reluctant to do anything that puts them in the spotlight given the fact many sides of politics have called for greater supervision of the sector.

“The banks do want to lift rates in response to rising funding costs and the additional costs they face for the extra compliance and regulatory increase on reserves they had to have in place by the end of June,” Kolenda said.

“But the uncertain election outcome and other factors will also be weighing on the banks, which have come under attention from both sides of politics,” he said

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