Home Loan Rates May Fall By 1988

CANBERRA: Interest rates continued to fall yesterday in the wake of the mini-Budget.

The falls led bankers to predict that Government spending cuts may lead to falls in home loan rates by the end of the year.

The announcement yesterday of a $180 million widening of the current account deficit brought only a temporary slowing in the rate slide.

As professional interest rates continued their fall of the last six weeks, the Bank of New Zealand and the Bank of Tokyo joined other big lenders in dropping rates on business loans.

The Reserve Bank also dropped its rediscount rate by 0.5 per cent to 15.5 per cent, signalling a further easing of monetary policy.

Economists say a big slide in interest rates has begun, and it could allow banks to drop their 13.5 per cent rate on regulated home loans in time for an end-of-year election.

The chief executive of the Westpac Bank, Mr Bob White, said the impact of the mini-Budget would be positive for rates.

"The only rates still out of kilter with the market are the housing rates,"he said.

"But if 1 per cent to 1.5 per cent is trimmed off prime rates in the next few months, which is quite possible, deregulated housing rates may fall before the end of the year."

The chief executive of the National Australia Bank, Mr Nobby Clark, said the mini-Budget spending cuts were "in the right direction".

"I think interest rates will fall, but any reduction in this area will need to have a sympathetic application of monetary policy through the Reserve Bank," he said.

"If we get some quick responses from the bank I think falls in interest rates might be quite quick indeed."

The Treasurer, Mr Keating, said: "What the Government did should promote a better interest rate climate and the scope for further falls in interest rates.

"The measures will no doubt lift confidence and lift investment."

The value of the dollar was virtually unchanged by the widening of the current account deficit to $996 million in April. That is the upper end of financial market expectations from a revised figure of $815 million in March.

The increase in April was largely because of a 12 per cent drop in exports, after adjustment for seasonal factors. The underlying trend in the figures also showed a slight decline for the fourth successive month.

Imports increased by 1 per cent, although the underlying trend in the figures continued on the downward path it has followed since November last year.

The balance on merchandise trade - the difference between exports and imports of goods - showed a $430 million turnaround from the $261 million surplus in March, in seasonally adjusted terms. The trend figures, however, continued the improvement evident since mid-1986.

The figures suggest that the Government expects monthly current account deficits of more than $1 billion for the last three months of the financial year to reach its new prediction for the year of $13.75 billion.

The prospect of an average $1 billion monthly current account deficit could undermine present confidence.

Market sources say, however, the inflow of investment funds from Germany, Europe, Japan and the US resulting from the weakness of the US bond market will continue to fuel the bull run in Australian interest rates.

They also feel the Reserve Bank will continue to sell dollars, putting a cap on the currency and allowing the improved market confidence to be reflected in lower interest rates.

The balance of payments figures show the Reserve Bank sold about $2.8 billion in April after an $800 million intervention the previous month.

Bull run continues.