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Another rate cut on the cards?

We could see another rate cut in February* by the Reserve Bank of Australia (RBA).

Woolworths Limited’s (ASX: WOW) new chairman, Ralph Waters has told the Australian Financial Review (AFR) that the latest 0.25% rate cut would do nothing in the short-term. He added that federal government stimulus spending post the global financial crisis has only postponed Australia’s pain.

Leanne Pilkington, general manager of Sydney estate agency, Laing + Simmons has also told the AFR that because the major banks were not passing on the full rate cuts, the RBA had lost the ability to stimulate the housing industry. Ms Pilkington  also noted that more people are staying put, fewer first home buyers were buying and those households in need of upgrading their homes are hesitant to move because of the current economic climate.

Related: Banks refuse pleas to pass on full rate cut

As we noted yesterday, interest rate cuts appear to be having less of an effect – a situation that Japan is experiencing, despite have rates close to 0%. People are still unwilling to spend, and it may be partly due to the banks not passing on the rates cuts in full. Consumers’ thoughts may be that “well, if the banks can’t afford to pass on the full rate cut, then maybe we can’t afford to move, upgrade, renovate or splash out on consumer goods”.

Harvey Norman Holdings (ASX: HVN) chief, Gerry Harvey said the Reserve Bank should have cut rates by 1% to have any immediate impact. Wesfarmers Limited’s (ASX: WES) Richard Goyder, and Myer Holdings (ASX: MYR) boss Bernie Brookes were more upbeat, suggesting the 0.25% cut would help retailers this Christmas.

Mr Waters, also the chariman of Fletcher Building Limited (ASX: FBU), said he held grave fears for Australian manufacturing companies, suggesting that many would be gone, unable to survive with just a few small interest rate cuts.

The Foolish bottom line

The RBA will be closing watching economic data over the next two months. If there are no further signs of improvement, we could yet see another rate cut in February – which would be the lowest cash rate in more than 20 years.

NOTE: the central bank doesn’t meet in January.

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Motley Fool writer/analyst Mike King owns shares in Woolworths. 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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