Reserve Bank of Australia (RBA): Cutting interest rates by 25 basis points
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.
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