Westpac cuts mortgage rate below 5%

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In a sign that banks may be pre-empting further interest rate cuts by the Reserve Bank, Westpac Banking Corp (WBC.AX) has cut its two-year fixed rate home loan to less than 5%.

Comparison website, RateCity showed the average cost of a three-year fixed home loan had fallen to 5.53%, the lowest level in 23 years. RateCity said it had become cheaper for the banks to offer these rates, because of expectations that the RBA will cut the cash rate below its current level of 3%.

National Australia Bank (NAB.AX) is offering a three-year fixed loan at 5.29%, while the ANZ Bank (ANZ.AX) and Commonwealth Bank (CBA.AX) offer a rate of 5.39%. Westpac now offers the cheapest two-year fixed loan among the four, after slashing the interest rate by 0.4% to 4.99%.

Fixed rate mortgages are priced off bank bill swap rates, which take into account market expectations of moves in official interest rates according to The Sydney Morning Herald, and markets are pricing in a 50% chance of a rate cut to 2.75% in early March. In the RBA’s February Monetary Policy statement, Governor Stevens suggested there was “scope to ease policy further”.

Additionally, the banks have found their wholesale funding costs dropping – debt markets are now charging less than half of what they did last year.

With the retail, media and building sectors apparently still struggling, the central bank is likely to weigh up economic data released in the next four weeks, before making its decision. Any further downward trends in the economy could well see the RBA cut rates.

Foolish takeaway

Many sectors of the economy have been pleading for the RBA to cut rates further and faster, as they struggle with weak consumer sentiment as well as cyclical and structural changes in some industries. A cut in March would bring some welcome relief.

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