Will the RBA cut rates further?

Central bank under pressure and walking a fine line

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

With the Australian dollar shooting through the US 95 cent mark today, the Reserve Bank of Australia (RBA) could be forced to cut rates further.

The central bank has noted a number of times that the Australian dollar was higher than it would like, and the US dollar could keep falling, push up our dollar even further. A higher Australian dollar makes it harder for our exporters to compete globally, while also making imports more attractive.

The RBA last cut the official cash rate by 0.25% to a record low of 2.5% on August 7, this year, partly in an effort to depreciate the high Australian dollar. Since April 2013, when it rose above US$1.05, the dollar had fallen 15% to below 90 US cents in August.

With US stimulus likely to continue at US$85 billion a month for the foreseeable future, the US dollar is likely to depreciate against most major currencies, and we could see the 'Aussie' back above parity in the near future.

But the RBA has to balance further rate cuts with rising property prices. Lower interest rates encourage more buyers to take out mortgages to buy more property, pushing up property prices even further. While the central bank doesn't believe that Australia is experiencing a property bubble, further rate cuts could see house prices rocket upwards, potentially leading more people to use the rising equity in their homes to load up on debt to buy more property.

Additionally, it seems the rising self-managed superannuation sector with around $500 billion of assets is looking to load up on property.

Already there's talk that Australia's central bank may have to follow the lead of its New Zealand counterpart, and place a cap on mortgage loan-to-valuation ratios, to try and limit property 'speculation'. But the big four banks ANZ Bank (ASX: ANZ), Commonwealth Bank (ASX: CBA), National Australia Bank (ASX: NAB) and Westpac Banking Corporation (ASX: WBC) have warned that any cap would only hurt first-home buyers, and not impact heavily on property investors.

Foolish takeaway

When it comes down to it, the RBA is unlikely to cut rates further, just to lower the Australian dollar and risk creating a property bubble. Instead, exporters and Australian companies with offshore operations look likely to suffer, as the Australian dollar rises to parity with the US dollar.

Interested in a dividend-paying stock that's not a bank? Discover The Motley Fool's favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of "The Motley Fool's Top Dividend Stock for 2013-2014."

More reading

Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »