THREE of Australia’s big four banks now expect a cut in official interest rates in September followed by more rate relief by Christmas, although hopes that borrowers will benefit are slim.

Economists at major financial groups now expect the first rates cuts this year rather than in 2009 after the Reserve Bank of Australia (RBA) indicated on Tuesday it was looking at a less restrictive monetary policy stance.

Interest rates were left on hold at a 12-year high 7.25 per cent this month for the fifth successive month but RBA governor Glenn Stevens said that demand was likely to be subdued as economic growth slowed.

ANZ, National Australia Bank and Westpac now forecast a rate cut in September followed by another easing in the December quarter and more relief in 2009.

Conversely, Australia’s biggest home lender, Commonwealth Bank, says interest rates will stay on hold to the end of 2009 as the resources boom fuels inflationary pressures.

However, hopes that borrowers will benefit to the full extent from the fall in rates appear slim. The heads of Westpac and ANZ told a federal parliamentary inquiry in Melbourne into banking competition today that they would not fully pass on an RBA rate cut.

The bullish take on rates contrasts with the stance less than three weeks ago when ANZ was predicting the RBA would raise rates in August and November but the bank, Australia’s fourth biggest lender, now says rates will be cut in September and November.

“It’s amazing what a fair bit of softer data can do,” said ANZ economist Alex Joiner.

“The Reserve Bank has talked down interest rates quite a bit. They made it clear in their statement that’s what they’re going to do and that’s been convincing for us.

“They want to see softer domestic demand but they want to see wages growth remain under control.”

National Australia Bank head of economics Jeff Oughton said the RBA would cut rates in September by either 25 or 50-basis points.

He said rates would be eased by half a percentage point by the end of 2008, and predicted another 75-basis point cut in the first half of calendar 2009 that would take the cash rate down to six per cent for the first time since November 2006.

“There are tighter financial conditions and then there’s a second-round effect of falls in equity prices and a weaker housing outlook, as well as higher oil prices,” Mr Oughton said.

“Growth is going to slow and stay down well below potential for the next couple of years, so we don’t have any inflation problems.”

Westpac forecasts the RBA will ease rates by 50-basis points next month, following up with a 25-basis point cut by Christmas and yet another quarter of a percentage point easing in the March quarter of 2009.

A 100-basis point easing in interest rates by Easter would take the cash rate back to 6.25 per cent - the same level as early August 2007 before another round of tightening, with four increases - in August, November, February and March.

“It’s a case of trying to avoid these downside risks to growth which appear to be there at the moment,” Westpac senior economist Andrew Hanlan said.

“High petrol prices, the credit crunch and the Reserve Bank tightening has had a big dampening effect.”

An economist with the Commonwealth Bank’s trading arm CommSec, Savanth Sebastian, said the RBA would leave interest rates on hold as rising terms of trade, the ratio of export to import prices, helped keep inflation above the central bank’s 2 to 3 per cent target.

“We haven’t seen that rise in national income since the Korean War of the 1950s,” he said.

“With the jobs market remaining quite resilient, there’s still risk to interest rates remaining at the level they’re at.”

Mr Sebastian acknowledged rates could be cut by Christmas if spending levels did not pick up.