Timing off for interest rate cut

Published in the Geelong Advertiser, January 2015 by Dale Gillham

While I’m all for paying lower interest rates, is the current call by the big banks for the RBA to further cut the cash rate really what’s best for our country, or simply good business for the banks?

The big banks are calling for the RBA to cut the cash rate, by a quarter of a percent from 2.50 per cent to 2.25 per cent, which would see interest rates fall, so as to stimulate borrowing. As the big banks seem to be the main campaigners, it would be wise to pay closer attention to the debate. We all can recall what occurs when banks are allowed more influence and control, just think of the GFC.

The cash rate has been on hold for seventeen consecutive months which means that conditions for borrowers, investing in assets like property and shares, have been very good for some time. However, the current rate of credit growth is not enough for the banks, they want us to borrow more.

However, I don’t believe that a cut is justified right away, and that a quarter of a percent is not going to be a big enough driver to create the sort of credit growth that the banks believe is needed. What this cut would do is leave the RBA on a thin rope, as the lower they go with the cash rate, the less room they have to make any big cuts if the economic conditions really demand it.

So what do we expect in the market?

Last week the All Ordinaries (XAO) index pulled back to again test the support zone, between around 5200 to 5300 points, before rebounding strongly during this week’s trade. Given the strength of this zone, there was always a reasonable probability that the market would pull back here once again, however I didn’t expect the move to occur as quickly as it did. The market closed down at around 5280 points on Friday. But, even so, relief was in sight as a reversal followed to push the XAO back above 5400 points. Now, based on my previous reports, you know this is a good sign.

The market is more likely to continue higher through 5500 points over the next couple of weeks than fall. Remember though to remain alert as these rises are not without their falls, however, by now you will recognise that this is all part of what the market must do to go higher.

Back to Articles