17th August 2011: Big banks cut fixed rates in response to world turmoil

A WEEK ago experts were warning interest rates were going up. Now lenders are cutting them.

Sydney-based banks – Commonwealth, Westpac and St George – led the pack yesterday reducing their interest rates on fixed-term loans.

The fixed-term rates offered by these lenders are now well below the average discount variable rates which rise and fall with movements in the Reserve Bank's official cash rate.

Variable rates are favoured by the vast majority of home borrowers but the head of retail banking services at Commonwealth Bank, Ross McEwan, said yesterday many borrowers wanted certainty with their home loan repayments and that fixed loans offered "that peace of mind".

The cuts to fixed-loan rates follow a dramatic shift in global economic sentiment over the past few weeks. Growing concern about the euro zone debt crisis and the possibility of a double dip recession in the US triggered turmoil on international financial markets.

The decision by ratings agency Standard & Poor's to downgrade the sovereign credit rating of the United States to AA+ from AAA has contributed to the volatility.

The interest rates on long-term bonds have also fallen sharply, making it cheaper for lenders to fund mortgages. This has helped banks offer lower interest rates for fixed-term home loans.

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