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.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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