Not too long ago, local commentators were fretting about the state of the US economy and its fall from grace with global credit ratings giants as the government floundered unsuccessfully to make a dent in the country’s mounting deficit.
Recently though, economists have turned their attention to the ailing European markets where equities are spending more time in the red than the black and the critical funds borrowed by the banks to in turn lend out to consumers like us are showing alarming signs of drying up.
You know you’re in a pickle when the big four here are down graded a notch by Standard and Poors and are struggling to tap into overseas interbank funding markets without paying through the teeth at rates way beyond what they were just a couple of months ago.
So what does this mean for interest rates here at home? Well, put simply, it would take more than the Reserve Bank shaving a sliver off the current cash rate as we proceed into the New Year in order for the banks to generously pass a cut on to borrowers. In other words, I wouldn’t be “banking” on an interest rate reprieve from Santa for some time to come!
In other words, if the current pricing of funds continues to progressively increase for the next one to two years, Australian banks might only be in a position to consider passing on an interest rate cut from the RBA if it was in the order of half a per cent or more.
While this is in no way an ideal scenario for borrowers, we can at least thank our lucky stars that the central bank still has plenty of breathing space in terms of its ability to reduce rates should the Europe situation topple into full blown crisis territory. It will certainly be interesting to see how things play out over 2012. Watch this space!