RBA’s Christmas present?

Central bank indicates further rate cuts may be coming

Mortgage holders could be in line for an early Christmas present next month, courtesy of The Reserve Bank of Australia (RBA).

In minutes of the bank’s last board meeting, released today, the RBA said “Members considered that further easing may be appropriate in the period ahead.” A translation of that into plain English suggests that further official interest rate cuts may be likely, and with the next bank meeting early in December, we could see a rate cut before Christmas.

Of course we’d need the banks including Australia and New Zealand Banking Group (ASX: ANZ)National Australia Bank (ASX: NAB)Westpac Banking Corporation (ASX: WBC) and Commonwealth Bank of Australia (ASX: CBA) to play ball and pass on most, if not all of the rate cut to borrowers. With the banks’ net interest margins under pressure, it’s likely that the banks could again withhold some of the cut. If the RBA does cut rates, ANZ borrowers may not see any benefit until the end of the month – ANZ has moved to updating its interest rates on a monthly basis, rather than follow the RBA.

For those investors with large bank deposits, or funds invested in term deposits, a rate cut wouldn’t be great news, as deposit interest rates will likely fall by the full cut in the official cash rate.

In the minutes, the RBA said a mix of improved global conditions, higher inflation and domestic economic uncertainty prompted it to keep the cash rate unchanged at 3.25% in November, but conditions could change between now and the next meeting. If the outlook for the international economy deteriorates, or if signs suggest Australian growth is slowing, then we could see a cut in December.

Most economists expect the RBA to cut rates either in December or February next year (The central bank doesn’t meet in January).

The Foolish bottom line

We here at the Motley Fool have decided not to try predicting interest rate movements, instead we’ll leave that to the economists.

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