Reserve Bank rate cut today a “no brainer”

The Reserve Bank of Australia is poised to cut Australia’s official interest rates today with analysts claiming a rate cut is a “no brainer” for the bank.

The RBA last cut the official interest rate of 4.25% in December 2011 and will announce at 2.30pm (AEST) today whether the rate will be cut again or stay the same.

CommSec economist Craig James told SmartCompany he was expecting a rate cut of a quarter of a per cent but “could not rule out” a cut of up to half a per cent. 

“Each Reserve Bank decision is significant but at present we think the economy needs a kick along through another rate cut,” says James.

“Certainly the economy is under control, so it is a no brainer that the Reserve Bank will cut rates.”

James says he is unable to comment on whether the banks are likely to follow suit and cut their interest rates as well.

“At the end of the day the banks will make their decision on it, but I think that any rate cut will get some follow through by the banks, but it will be a decision for them.”

Pressure has been mounting over the past months for the RBA to cut the official interest rate in order to help homebuyers and Australia’s ailing manufacturing and tourism industries.    

The incoming head of Queensland University of Technology’s School of Business, Professor Tim Robinson, said a reduction in interest rates would put downward pressure on the Australian dollar and this in turn would help those industries that have been hit hardest through the global financial crisis.

“A lower Australian dollar would enable Australia’s tourism industry to be more competitive internationally by making Australia a more affordable destination,” he said.

“The manufacturing industry would benefit as a lower Australian dollar would make manufacturing exports more attractive internationally and increase the cost of imports.”

Robinson said the benefits of an official interest rate cut would be felt by business regardless of the decisions of individual banks.

“A signal that rates are on the way down will in itself have an impact on the value of the dollar.”

Robinson said a fall in interest rates would also be good news for home buyers so long as the banks followed suit.

“If the RBA announces a cut in rates tomorrow the general public will be watching the banks in the coming days in anticipation of a cut in home loan interest rates,” he said.

The Australian sharemarket has reacted positively in response to expectations of an RBA rate cut. 

Tim Waterer, senior trader at CMC Markets, said the expectation of more conducive growth conditions had propped up some index heavyweights.

“The lethargic performance of the Australian sharemarket in 2012 typifies one of an economy constrained by high interest rates, so a looser monetary policy setting may open the door to the 4500 level on the ASX200 by mid-year should US equities maintain their current upward trajectory,” said Waterer.

“If in their statement [today] the RBA show no inclination for a follow-up rate cut in June, we could in fact see the AUD rise after the 2.30pm announcement.”