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Rate cut winners

Yesterday’s decision by the Reserve Bank of Australia (RBA) to cut official interest rates by 0.25% to 3.25% is likely to give local retailers a boost. While the major banks have yet to move to cut their interest rates, its highly likely that they will do so in the coming days, especially after the Federal Treasurer, Wayne Swan, urged the banks to pass on the full rate cut. Bank of Queensland was the first of the regional banks to move, passing on 0.2% to its home loan customers.

If the banks do cut rates, many homeowners should see their mortgage repayments fall slightly, allowing them a little bit of extra breathing space, and perhaps extra income to fund some of those luxuries they’ve done without. Coming up to the Christmas holiday season, that could be good news for consumer discretionary stocks such as JB Hi-Fi Limited (ASX: JBH), Premier Investments Limited (ASX: PMV), Nick Scali Limited (ASX: NCK) and Kathmandu Holdings Ltd (ASX: KMD).

We reported yesterday that some retailers are stocking up on inventory as they expect higher sales in the last quarter of the year, and want to ensure they have enough product to meet demand. Heavy discounting is also expected to feature, giving consumers an additional reason to go out and spend.

Additionally, many economists are expecting further interest rate cuts in the next six months, which should provide additional spending stimulus.

However, not everyone thinks the rate cut will prompt consumers to go out and spend. The main reason the RBA cut rates was on concerns over China’s slowing growth, Europe’s lingering sovereign debt issues, and the high Australian dollar. While the dollar has fallen slightly, Europe’s woes still exist, and consumers may still be worried about the fallout from China cutting back on buying our resources and energy. That may prompt many Australians to keep their hands in their pockets for a while yet.

Foolish takeaway

It will be some time before the effects of this rate cut show up in the local economy – and may have very little effect, should the banks refuse to pass on at least some of the rate cut to customers.

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Motley Fool writer/analyst Mike King owns shares in JB Hi-Fi. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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