The US stock market meltdown has heightened expectations of an easing in the RBA’s monetary policy, with investors anticipating a 0.50% rate cut as early as October.
Following the shock collapse of Lehman Brothers and fire sale of Merrill Lynch, investors have jumped on predictions that the RBA will deviate from its currently cautious approach, rating the probability of a 0.25% cut in October as a certainty and placing a larger cut of 0.50% at 63%.
The financial markets anticipate further cuts of 75 basis points to be made by the end of the year and the rate to hit 5.75% by May. However, the predictions come at odds to the cautious approach the RBA took when it cut rates for the first time in seven years earlier this month – a factor likely to weigh heavily on the central bank’s strategy going forward.
Despite the high expectations of another rate cut, the turmoil on Wall Street is likely to affect the cost and availability of credit worldwide as well as cause the global economy to slow further.
In a devastating blow to borrowers, analysts have predicted that lenders are unlikely to pass on any upcoming RBA rate cuts due to the spate of Wall Street falls.
Although the major banks jumped on the most recent RBA rate cut by passing on the immediate rate reductions in September, the financial turmoil in the US is likely to rob Australian borrowers from similar relief when the central bank next lowers the official cash rate as early as October.
The collapse of two major US investment banks and current anguish facing insurance giant AIG, have resulted in higher wholesale funding costs, indicating more pressure and less funding for banks in the future. The tightening of liquidity will translate to reluctance by banks to drop fixed and variable rates.
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