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RBA Cuts Interest Rates by 25 Basis Points

Stuart Lucy

Stuart Lucy is an Investment Specialist at the Australian Stock Report, and has gained exposure to funds management and investment banking throughout his career. He draws on this experience to provide macroeconomic commentary and actionable investment insights to clients. Stuart is responsible for writing reports, is involved in delivering Macrovue webinars and provides general advice to our members on portfolio construction. Stuart currently holds RG146 General and Securities qualifications.

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The Reserve Bank of Australia (RBA) Board met today (2 July 2019) and decided to reduce the crash rate by 25 basis points from 1.25 per cent to 1.00 per cent. The main reasons for this reduction in the crash rate stems from weak economic growth both in Australia and internationally, weak consumption growth, and to keep the inflation outlook consistent with the 2 – 3 per cent inflation target.

The RBA seeks to increase economic growth, consumption growth and keep the inflation rate between 2 – 3 per cent. This is seen to be achieved by the reduction in the cash rate to incentivise investment and stimulate economic growth. The Governor of the RBA mentioned:

Today’s decision to lower the cash rate will help make further inroads into the spare capacity in the economy

The question for investors is how will this affect Australian financial markets? The reduction in the cash rate is in line with market expectations. Consequently, there has been little initial reaction in the equity market. Beyond this initial reaction, companies should be able to borrow at a lower interest rate, incentivising investment through further availability of cheap credit. Additionally, with a lower crash rate, this might incentivise investors to move out of the bond market and into equity markets.

An important point to note is that the yield on 10 year government bonds has hit record lows at 1.3 per cent. This suggests bond investors are worried about the state of the economy in the short-term. The Government’s proposed reductions to income tax are also required to provide a stimulus to the economy.

Investors this week are watching closely the equity and bond markets to observe the reaction the markets take to the reduction in the cash rate. Also, the major banks may be providing a reaction to this decision in their pricing decisions including housing loans.

 


 

Disclaimer:

This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978) (“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).

This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.

ASR has no position in any of the stocks mentioned.

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