At it’s December meeting the RBA Board decided to drop the cash rate by 0.25%, taking it to 4.25%. This is the second consecutive drop in interest rates after the Board elected to drop by 0.25% at it’s November meeting on Melbourne Cup Day. This now well and truly confirms interest rates are in a downward trend and no doubt comes as a welcome relief to struggling mortgage holders as well as the retail sector, desperately hoping to boost the all important Christmas sales period.
RBA Governor Glenn Stevens, in his monetary policy statement recognised that the non-resource side of the economy is struggling as households and businesses have shifted to an ultra conservative posture. He also spelt out the linkages between what is happening in Europe and domestic circumstances.
Financial markets are very volatile and financing conditions difficult, particularly in Europe, although the Bank also referred to the difficult term funding conditions for Australian Banks as well.
Many economists, predicted that the RBA would keep rates on hold this month and wait to see how the retail sector fares over Christmas, but more importantly to see how things develop in Europe over the next few weeks and if necessary provide greater stimulus by dropping rates by 0.50% or more in one hit. However, given our cash rate is quite high compared to other OECD economies, the RBA certainly has plenty of room to move and if things deteriorate further they still have plenty of bullets left to fire.
Hopefully, this cut will start to have the desired effect for struggling households whilst also giving the retail sector a much needed boost over the next couple of months, until the RBA Board meets again in February.
Mark Lewis is the Executive Chairman of Bernie Lewis
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