Rate cut may not be all that beneficial, expert says

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Instreet Investments managing director George Lucas dubbed the recent decision of the Reserve Bank to further cut the cash rate to a new historic low of 1.5 per cent as “completely wasted,” as it failed to place downward pressure on the Australian dollar.

“Foreign inflows are also having an effect on the Aussie dollar, which is on the rise despite the RBA cutting rates to record lows in August,” Lucas said. “This rise in the dollar, coupled with mortgage lenders not passing on the full rate cut to borrowers, has seen the RBA’s recent decision completely wasted. If it is a weakening of the dollar that the RBA is interested in, then they may think twice about cutting again.”

The attractive yields that the Australian stock market offered resulted in strong capital inflows and leading Australian companies being included in global yield ETFs listed in the United States. Because of low interest rates all over the world, this hunt for yield is set to continue being a boon for Australian equities.

“With the amount of debt in negative yield now at a staggering $13 trillion, it is no wonder that the main driving force for equities will be the global hunt for yield,” Lucas said. “And it’s not just equity yield that is attractive in Australia. The AAA-rated government bonds are producing significant yield when compared to negative yields.”

But AMP chief economist Shane Oliver still believes that another rate cut later this year will occur due to weak inflation data. He said, “The continuing weakness in wages growth and the risks it poses to inflation area consistent with our assessment that the RBA will cut interest rates again this year.”

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Tuesday, Sep 26, 2017
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