The Reserve Bank is expected to consider cutting interest rates at its board meeting next week, but bankers are warning that reductions may not be passed on to consumers.
Financial markets have put the chance of rates being cut in September at 70 per cent in the wake of falling retail sales and reduced consumer and business borrowing. They expect a second reduction before Christmas, The Australian reports.
However, bank funding costs are still rising, and bankers warn that there will be no automatic flow-through to consumer rates.
Suncorp chief executive John Mulcahey said yesterday that there was no longer a clear relationship between mortgage rates and the official interest rate.
He said the credit crunch had yet to loosen its grip. "It's still quite volatile and spreads are quite wide. Funding is still quite constrained ... there are no clear signs it's improving."
A senior bank executive said yesterday that he expected a full flow-on to mortgage customers from any easing in official rates.
However, he warned there could be adverse economic consequences from banks feeling a "political imperative" to cut rates, even when their funding costs had not fallen.
"Governments could back themselves into a corner if they create political pressure to cut variable rates," he said.
"If funding costs have not declined, the rational response from a bank would be to cut back on lending, which would mean a further contractionary effect for the economy."
The executive said mortgage rates and official interest rates no longer moved in tandem, as bank funding costs were spiralling because of the global liquidity shortage. Banks were also lifting deposit rates to try and reduce their reliance on wholesale funding, but that, too, was raising their costs.
"Deposits are king at the moment, so with deposit rates going up it's quite possible that any cut in official rates won't lead to an overall reduction in funding costs," the executive said.
