Two interest rate cuts to come? BHP and Rio hope so

Westpac’s  (ASX: WBC) Rob Whitfield has predicted that despite the cash rate being kept on hold by the RBA on Tuesday, there will likely be two more rate cuts worth 0.25 percentage points before the current easing cycle is finished.

After the official cash rate was cut last month from 3%, the Australian dollar (AUD) has fallen in value significantly to a new 30-month low, which has largely benefited shares in a number of Australian companies such as QBE Insurance  (ASX: QBE), BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO). Having fallen from around $US1.07, the AUD has sunk to as low as US94 cents. However, whilst the RBA singled out the AUD, it stated that it was still high – therefore, should the dollar remain at current levels, it is likely that further rate cuts will occur.

Whilst Westpac’s chief economist Bill Evans has forecast three further rate cuts, Whitfield has suggested that three may be ambitious and “quite aggressive from here”, but does think there will still be two to come.

In comparison to the cash rate however, the variable home loan rates of the major banks remain quite high which can be partially attributed to high funding costs experienced in the industry. Last month, the ANZ (ASX: ANZ) became the first bank since 2008 to pass on a higher rate cut than the RBA, whilst competitor National Australia Bank (ASX: NAB) made suggestions that it would pass on higher rate cuts out of sync with the central bank. Meanwhile, as Westpac maintains the highest standard variable home loan rate out of the big four banks sitting at 6.26%, it is now also under pressure to cut rates out of cycle.

Foolish takeaway

Despite hopes of further rate cuts, Whitfield has predicted that demand for loans will remain low until they are passed on. Should more cuts be passed on, the banks could start to see higher demand for loans, and hence, higher revenues.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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