US interest rate cut triggers Aust fears


Electronic Media Monitoring Service 


19-09-2007 07:44 PM



Parl No.


Channel Name



19-09-2007 07:44 PM



19-09-2007 08:24 PM

Cover date

2007-09-19 19:44:26

Citation Id




O\'BRIEN, Kerry, (journalist, ABC)



HOY, Greg





Open Item 

Parent Program URL
Text online


Media Deleted


System Id


Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document

US interest rate cut triggers Aust fears -

View in ParlViewView other Segments

Reporter: Greg Hoy

The decision by the US Federal Reserve to cut interest rates by half a per cent might be welcome
relief for home owners and lenders across America but does this move by the world's largest economy
make it more or less likely that Australia will see an interest rate rise by the end of the year?

KERRY O'BRIEN: With more and more home owners feeling the pinch from high home mortgage repayments
and interest rates on an upward trend, they're no doubt hoping Peter Costello is right when he
says, in the wake of last night's interest rate cut in America, that commercial banks here will now
have no need to push their rates up.

As Australia's Reserve Bank governor Glenn Stevens recognised in a Sydney speech yesterday, the
ongoing turmoil in the US subprime mortgage market has increased the cost of credit for Australian
banks, fuelling speculation or an expectation that banks would be forced to pass that cost on. But
it remains to be seen how quickly the US rate reduction will impact on America's credit squeeze,
given that experts are still divided on how much more pain is yet to be felt from the subprime

Greg Hoy reports.

GREG HOY: An intercontinental mortgage meltdown, sparked in America by a potent cocktail of
irresponsible lending in the subprime, low security mortgage market and a 20 per cent oversupply of
housing. After months of inaction, the US Federal Reserve finally moved with unexpected force last
night, slashing interest rates half a per cent to stimulate a rattled US economy and increasingly
volatile stock market.

DAVID WYSS, CHIEF ECONOMIST, STANDARD AND POOR'S: Well, the 50 basis point rate cut was a surprise.
Most of us had expected them only to move a quarter.

ALAN OSTER, NATIONAL AUSTRALIA BANK: We were surprised. We thought that they would be cutting rates
by 25 points and the reason we didn't expect 50, was it would sound a little bit as if it was

DAVID WYSS: What it really shows is that the mortgage crisis is not a US phenomenon. The housing
bubble was a worldwide phenomenon, because Greenspan was fundamentally right, it's being driven by
a worldwide glut of liquidity and low interest rates around the world. The people who try to track
it to just what happened in the US aren't paying attention, because this happened in almost every
major industrial country.

GREG HOY: The desired effect, the Dow Jones or share average on Wall Street surged more than 250
points, typically reverberating in Australia where the market rose more than 2 per cent, the dollar
up 2 cents. Only yesterday the governor of the Reserve Bank of Australia, Glenn Stevens, was at
pains to emphasise Australia would avoid the mortgage mess that's beset the American economy and
mortgage market, as only 1 per cent of Australian mortgages are low security subprime loans,
compared to 15 per cent in the United States.

GLENN STEVENS, RESERVE BANK GOVERNOR: Going into this episode, the economy is travelling very
strongly with the outlook for growth and inflation being revised higher over recent months.

GREG HOY: But some suggest in areas like Melbourne's inner suburb of Northcote and outer suburbs of
Sydney and Brisbane, there is an albeit smaller but nonetheless disturbing pattern of mortgage
stress beginning to emerge.

MARTIN NORTH, GENERAL MANAGER, FUJITSU CONSULTING: Mortgage stress in Australia is probably more
prevalent than we previously thought. There are around 67,000 people who are in, what we would
call, severe mortgage stress. In other words, they have missed repayments, they are considering
refinancing their loan. Potentially they may have to even think of selling up. And there's an even
bigger number who are actually in mild stress, in other words, they are actually a little bit
behind or they've had to put some borrowing on the credit card or any form of borrowing to be able
to pay their mortgage on time. And, according to this report, the pain will yet grow.

GREG HOY: Fujitsu Australia and JPMorgan surveyed 26,000 mortgagees across Australia, warning -

MARTIN NORTH: A greater proportion of the population is likely to be under mortgage stress within
the next six or 12 months. In fact, we estimate perhaps 600,000 households will be in some form of
stress, and around 113,000 of those will be under severe stress.

GREG HOY: Federal Treasurer Peter Costello was keen today to soothe fears of further interest rate

PETER COSTELLO, TREASURER: There's no reason whatsoever for the major banks to lift rates to
housing borrowers. The Australian banks are highly profitable and well-capitalised.

REPORTER: What about -

PETER COSTELLO: There has been no movement in official interest rates.

GREG HOY: The Reserve Bank governor yesterday suggested, in that typically reserved econospeak,
that some banks or intermediaries he oversees may need to raise rates irrespective of what the
Reserve does with cash rates or official interest rates.

GLENN STEVENS: Some borrowers are being asked to recognise those higher costs in the rates they pay
for their loans, a trend which will continue if the higher funding costs to the institutions
persist. Hence it appears, at least at this stage, that we may well observe a further tightening of
financial conditions in the Australian economy over the months ahead.

GREG HOY: So what's that mean? It means some of the smaller lenders such as RAMS, even some of the
biggest ones to a lesser degree, such as the ANZ, rely on the availability of wholesale or
interbank borrowing to fund their home loans. Problem is, with the US mortgage meltdown the
availability of such global wholesale funds has gone down while their interest rates have gone up.
The larger institutions can avoid this problem by simply using their customers' bank deposits to
fund home loans. But those who aren't so lucky might just have to pass this increase in their
interest rates on to their customers.

MICHAEL NORTH: Lenders are finding that they're funding mix is changing and as a result of that
they've got higher costs, not surprisingly they'll be looking to pass those on to consumers, and so
I think people should expect to see their lending rates rise.

BILL EVANS, CHIEF ECONOMIST, WESTPAC: One has to assume that if this situation was to get worse
again, and if it was to last for a lot longer than I expect, that there is a risk at some point
that the banks would pass higher rates on. But I expect that the developments overnight that have
eased the situation, the trend seems to be back towards lower funding costs. That's certainly good

ALAN OSTER: The reality is they would have a higher cost of funds and so they either position
themselves to try and pick up market share or they pass some of it on.

GREG HOY: All seem to agree that interest rates in the United States will be cut further before
Christmas in a bid by the US Federal Reserve to avoid a recession. But opinions vary as to how long
before interest rates rise in Australia.

ALAN OSTER: In my view we have an unchanged rate forecast for as long as we can forecast, certainly
for the next few months, nothing, because everyone is going to sit and see what happens in the US.

MARTIN NORTH: It's likely that the RBA is going to put up base rates in Australia by, let's say, 25
basis points perhaps for the end of the year and another 25 basis points early next year.

GREG HOY: So, it will be an anxious wait for mortgagees to see who is proved correct.

KERRY O'BRIEN: Economists not agreeing on the future. That report from Greg Hoy.