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Will the RBA cut rates further?

With the Australian dollar shooting through the US 95 cent mark today, the Reserve Bank of Australia (RBA) could be forced to cut rates further.

The central bank has noted a number of times that the Australian dollar was higher than it would like, and the US dollar could keep falling, push up our dollar even further. A higher Australian dollar makes it harder for our exporters to compete globally, while also making imports more attractive.

The RBA last cut the official cash rate by 0.25% to a record low of 2.5% on August 7, this year, partly in an effort to depreciate the high Australian dollar. Since April 2013, when it rose above US$1.05, the dollar had fallen 15% to below 90 US cents in August.

With US stimulus likely to continue at US$85 billion a month for the foreseeable future, the US dollar is likely to depreciate against most major currencies, and we could see the ‘Aussie’ back above parity in the near future.

But the RBA has to balance further rate cuts with rising property prices. Lower interest rates encourage more buyers to take out mortgages to buy more property, pushing up property prices even further. While the central bank doesn’t believe that Australia is experiencing a property bubble, further rate cuts could see house prices rocket upwards, potentially leading more people to use the rising equity in their homes to load up on debt to buy more property.

Additionally, it seems the rising self-managed superannuation sector with around $500 billion of assets is looking to load up on property.

Already there’s talk that Australia’s central bank may have to follow the lead of its New Zealand counterpart, and place a cap on mortgage loan-to-valuation ratios, to try and limit property ‘speculation’. But the big four banks ANZ Bank (ASX: ANZ), Commonwealth Bank (ASX: CBA), National Australia Bank (ASX: NAB) and Westpac Banking Corporation (ASX: WBC) have warned that any cap would only hurt first-home buyers, and not impact heavily on property investors.

Foolish takeaway

When it comes down to it, the RBA is unlikely to cut rates further, just to lower the Australian dollar and risk creating a property bubble. Instead, exporters and Australian companies with offshore operations look likely to suffer, as the Australian dollar rises to parity with the US dollar.

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

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