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Currency wars: Rate cut next week?

More interest rate cuts could be on the way – and the first may even come next week.

The Reserve Bank of Australia’s (RBA) assistant governor, Guy Debelle has told a business breakfast that the central bank was open to cutting the official cash rate, should the need arise. He also suggested the RBA could cut rates to “counterbalance the pressures” of the strong Australian dollar.

The Australian dollar usually follows prices of commodities due to our heavy reliance on resources exports. But despite the falls we have seen in the prices of commodities such as iron ore, coal, aluminium and nickel, the Aussie dollar has stubbornly refused to fall below parity with the US dollar. Because of other major economies like the US and Japan stimulating their economies through the release of money, that has forced their currencies to drop, with the side effect of propping up the Aussie.

Last week RBA governor Glenn Stevens told a senate committee that the Australian dollar was somewhat overvalued, but the central bank was reluctant to intervene by selling the currency, noting “you need to be pretty confident that it is seriously overvalued, or the market is behaving in some quite irrational way, before you would launch large-scale intervention.

Mr Debelle’s comments suggest the RBA maybe considering interest rate cuts as a means of forcing the Australian dollar down. Although if interest rates were cut too far, that could cause other problems for the economy. Mr Debelle did note that recent cuts to the official cash rate have had less of an impact on mortgage rates than in the past, partly due to higher bank funding costs, which has meant the banks, including our big four, ANZ Bank (ASX: ANZ), Commonwealth Bank (ASX: CBA), National Australia Bank (ASX: NAB), Westpac Banking Corporation (ASX: WBC) have not passed on the rate cuts in full.

RateCity estimates the banks have passed on around 1.3% of the 1.75% of cuts to the official cash rate since November 2011.

Foolish takeaway

The RBA may have had enough, and decided “if you can’t beat ‘em, join ‘em”. That would be welcome news for many of our industries and Australian exporters.

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The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, 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.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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