RBA’s Rate Cut and the Australian economy

The country down under is back on the news after the Reserve Bank of Australia decided to cut its cash rate by 0.25 percentage points. So now the RBA’s cash rate is set at 2.25% — its lowest level in history. But still well above the cash rates of other leading economies including U.S., England, Japan, EU, and Canada.

This course was taken by Governor Stevens after ECB raised its ante by announcing of 1.1 trillion euro QE program, Bank of Canada reducing its rate by 0.25 percentage point for the first time in years, and the IMF recently projecting a slower growth rate for China – the country accounts for 29% of its total exports —  the country that is the main destination for Australia’s exports.

The country still faces two problems that the RBA will have to address: Falling commodities prices and a potential housing bubble. Both problems require different, and in certain situations, opposing measures.

The RBA cannot control falling commodities prices such as iron ore and copper prices – iron ore is the top export with 22% of its total export – but it depreciate its currency by cutting rates and Stevens’ goal of reaching 75c per USD is now within reach.

For the housing market this isn’t a good move but the RBA still has other measures it can take such as higher requirements for taking on mortgages.

What does it mean for an investor in an Australian company? Well, if the dividend is calculated in the Australian dollar, then a stronger currency against the US dollar could mean higher dividend pay, in the near term.

But the big question could mean cheaper debt in terms of interest rates and potential higher inflation, which tend to serve companies that have high debt burden in the Australian market.

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