In the last 24-hours, the odds of the Reserve Bank of Australia (RBA) cutting interest rates next week has surged.
Journalist Terry McCrann, writing in the Herald Sun last night said,
After 18 months of keeping its official interest rate unchanged, the Reserve Bank will almost certainly cut the rate at its first meeting back for the year next Tuesday.
McCrann has a history of correctly predicting RBA rate moves – although at one stage it appears he was getting the information directly from the ranks of the Central Bank's senior staff. That led the RBA to impose a media blackout prior to the Board meeting held on the first Tuesday of most months.
Last night he noted that the RBA finds itself in a similar situation to July 2013, when Governor Glenn Stevens noted that the outlook for inflation "may provide some scope for further easing". The month after, the RBA dropped the official cash rate to 2.5% – where it has stayed until now.
Additionally, the Aussie dollar is still higher than the Governor has previously stated he would like to see it at. Currently trading at around 79 US cents, Stevens has said that around 75 cents may be more appropriate.
Add in weak economic growth, lower than expected inflation, subdued wages growth, an uncertain employment outlook and weak consumer sentiment and it likely all adds up to a rate cut next month.
What does it mean for stocks?
Expect shares, especially dividend-paying stocks to be in big demand, as savers switch out of term deposits, low rate bank accounts and cash. Deposit rates will likely fall, and companies paying full franked dividend yields of more than 5% – grossing up to above 7% will be in big demand.
Will my bank cut my mortgage rate?
The big question many homeowners will now be asking is – Will the banks pass on all or any of the cut to mortgage borrowers?
I feel that we are heading into unchartered territory, and the big four banks, Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank (ASX: NAB) and Westpac Banking Corp (ASX: WBC) would likely pass on a very small amount of the cut to customers, if at all, to protect their margins.
We'll have to wait and see what happens next Tuesday, but it's shaping up as the biggest event so far in 2015 (not that we've had much of it yet).
