LATEST NEWS Home borrowers are tipped to see the biggest rate cut in seven years tomorrow as global financial market turmoil puts pressure on bank funding costs.
But a 50 basis point rate cut from the Reserve Bank of Australia (RBA) may not be fully passed on as the major banks battle high interbank lending rates and wholesale funding costs.
Expectations of a bigger than usual rate cut pushed the Australian dollar below 76 US cents this morning for the first time since October 2006.
Fears of more banking turmoil gained traction over the weekend after passage of the US government's $US700 billion ($A913.0 billion) financial sector bailout failed to stem a Friday night slide on US equity markets.
All 19 economists surveyed by AAP last week forecast a rate cut when the RBA meets tomorrow, with 11 of the experts forecasting a half a percentage point move.
This would be the first 50 basis point easing since April 2001.
The median forecast was for the existing seven per cent to fall to 6.5 per cent in October, with another rate cut taking official rates to 6.25 per cent by Christmas.
The federal government and the Australian Bankers' Association (ABA) say high borrowing costs would make it hard for the banks to match an RBA rate cut, even though the banks copied the RBA's 25 basis point move in September, the first cut in seven years.
Among the major banks, ANZ, NAB and St George are expecting a 50 basis point cut in October, with the Commonwealth Bank and Westpac tipping a smaller 25 basis point move.
The RBA board is due to meet tomorrow morning and announce its decision at 1430 AEDT.
A rate cut announcement would be the first back-to-back easing since the aftermath of the September 11, 2001 terrorist attacks in the US.
Suncorp strategist treasury analyst Peter Pontikis said the RBA would deliver a 50 basis point cut on October 7, as policymakers focused more on reducing standard variable mortgage rates than combating high inflation.
"It's not inflation 101, it's psychology 101," Mr Pontikis said from Brisbane.
"The Reserve Bank is seeking to alleviate the bank funding pressures by cutting rates."
Commonwealth Bank of Australia senior economist John Peters said while a rate cut was needed to improve credit market liquidity, Australia's encouraging economic fundamentals would make a smaller rate easing more likely in October.
"There is a significant risk that they could go a half," Mr Peters said, adding there was a 40 per cent chance of a 50 basis point rate cut.
"If they don't do 50 ... they will do another quarter in November."
Deutsche Bank chief economist Tony Meer agreed, saying the RBA would cut rates by 25 basis points in October, and follow up with another quarter of a percentage point easing by Christmas if the banks were cautious about dropping their lending rates.
"There's a risk that the fall in interest rates won't be passed on to consumers but let's see what happens," he said.
"The RBA has a long history of, rather than jumping around and exacerbating volatility, they're going to play a steady hand."
Repayments on a $250,000 standard variable home loan from the Commonwealth Bank would fall by $90 a month if mortgage rates were cut by 50 basis points to 8.83 per cent.
The ABA says the banks, which source half their funding from wholesale capital markets, were yet to pass on recent increases in borrowing costs.
Financial researcher Cannex senior financial analyst Harry Senlitonga says high interbank lending rates, also known as the three-month bank bill rate, would make the banks reluctant to match an RBA rate cut.
This weekend's passage of the Bush administration's plan to buy toxic mortgage assets failed to allay financial market fears about a global economic slowdown, with the key Dow Jones Industrial Average dropping by 1.5 per cent on Friday night and the Australian stock market falling by more than three per cent today.
