Mortgage rate cut 'unlikely'

Many mortgage and loan customers might be paying attention next month to see what decision the Reserve Bank of Australia makes on the interest rate.

Should the Reserve Bank decide to cut rates, it would theoretically be more likely that banks will pass the cut down to their customers.

However, borrowers should not be too optimistic, the Sydney Morning Herald suggests.

The newspaper quotes representatives from two of the leading financial institutions in Australia who gave statements on the subject recently - neither of which will be music to the ears of the public.

"It is in nobody's interest to keep rates high," said Mike Smith, chief executive of ANZ.

"However, I have to fund a book and I'm running a business. It isn't the welfare state … yet."

Similarly, Jim Sheffield, head of mortgages at Commonwealth, said his bank will pass on "as much as we can" to customers, but cautioned that these are "very turbulent waters" for the banking sector.

So why are the banks so cagey about passing on a cut? The answer lies in higher funding costs. The Reserve Bank noted recently that the cost of short-term debt had reached 80 basis points - almost double the six-month average.

ANZ's Mr Smith went on record this week to say that local banks are likely to become more selective as to whom they lend money.

The Australian newspaper quoted him as saying that the "quality" of lending will have to improve if the banking sector is to emerge from the credit crunch in good shape.

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