ASB out on a limb with interest rate cut

Photo / Glenn Jeffrey

People with mortgages hoping to hear that banks have dropped floating rates may be disappointed today when the official interest rate level is announced.

Reserve Bank Governor Alan Bollard's regular monetary policy statement this morning comes just days after the ASB Bank lowered its rate to 5.75 per cent.

Shamubeel Eaqub, a senior economist with the Institute of Economic Research, said most banking analysts believed the official cash rate would remain at 2.5 per cent.

However, he said he believed the rest of the banks would keep mortgage rates the same, rather than copy ASB.

"If you look at the commentary from the Reserve Bank in the last few months they've said: 'We think interest rates will be at or below current levels until late 2010'," he said.

"I think the general view is that the Reserve Bank will leave interest rates on hold and reiterate the view that interest rates will stay around current levels for some time.

"There's probably a small chance that the other [banks] will also reduce [mortgage rates] but my gut feeling is it will probably go sideways - floating rates probably will remain where they are," Mr Eaqub said.

Economists and banking analysts have disagreed on whether the official rate will be cut, or remain at 2.5 per cent.

ASB chief economist Nick Tuffley said on Tuesday that he expected the Reserve Bank to cut the rate by 25 basis points, but admitted he was in a minority. A Dow Jones poll of 13 banking analysts and economists found 12 predicted that rates would remain the same and one expected a cut of 25 basis points.

Asked if he thought ASB's rate cut was a good decision, Mr Eaqub said: "I can't really comment because it's a business decision ... It has probably worked well as a marketing tool if nothing else.

"They've reduced their interest rates marginally over everyone else. It's not a huge difference but they've created a lot of buzz around it. People are talking about ASB having the lowest mortgage rate in 40 years. There are some positive associations with that."

Mr Eaqub said most mortgages were fixed so mortgage rate changes were unlikely to affect many people.

Westpac spokesman Craig Dowling said yesterday that the bank's floating mortgage rate of 6.49 per cent was under review.