Why interest rates should NOT be cut today

Warwick McKibbin, a former board member for the Reserve Bank of Australia, has advised the central bank to hold off on cutting the nation’s official cash rate to fill the economic “void”, and instead stated that it is the government’s responsibility to boost the economy.

Yesterday, the Australian Bureau of Statistics released retail data that revealed sales were flat at 0.0% for June – marking the fourth consecutive month of sales weakness. Furthermore, business conditions also deteriorated for the month, as revealed by an Australian Chamber of Commerce and Industry report.

As reported by The Australian Financial Review, McKibbin said “trying to raise demand from cutting interest rates does not induce investment, especially when weak confidence by political incoherence is a driving force in the current Australian economy.”

Opposition Shadow Treasurer Joe Hockey supported this argument, suggesting that the economy should be growing faster and there should not be a need for interest rate cuts – particularly with the rate already sitting at an all-time low of just 2.75%.

Whilst some people believe that the Reserve Bank should hold off on a rate cut (and maybe cut them in six months or so), the financial market is giving it a 100% chance that it will be cut to 2.5% today. Should this transpire, it is likely that we will see the Australian dollar fall even further, after hitting a low of US88.48c yesterday.

Foolish takeaway

Whilst changes to political policies are certainly having an effect on the economy, a rate cut today would very likely increase consumer and business sentiment and we could see shares increase across a number of industries. For instance, retailers such as Myer (ASX: MYR), David Jones (ASX: DJS) or JB Hi-Fi (ASX: JBH) could see boosts with the market anticipating more spending, whilst the nation’s miners would also benefit from a lower Australian dollar.

Are you interested in our #1 dividend-paying stock? 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 contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

The 5 mining stocks we’re recommending in 2019…

For decades, Australian mining companies have minted money for individual investors like you and me. But if you believe the pundits and talking heads on TV, those days are long gone. Finito! Behind us forever…

We say nothing could be further from the truth. To earn the really massive returns, you’ve got to fish where others aren’t fishing—and the mining sector could be primed for a resurgence. That’s why top Motley Fool analysts just revealed their exciting new research on 5 ASX miners they believe could help you profit in 2019 and beyond…


The best way we see to play the global zinc shortage… Our #1 favourite large-cap miner (hint: it’s not BHP)… one early-stage gold miner we think could hit the motherlode… Plus two more surprising companies you probably haven’t heard of yet!

For free access to our brand-new research, simply click here or the link below. But be warned, this research is available free for a limited time only, and we reserve the right to withdraw it at any time.

Click here for your FREE report!