Could the RBA cut interest rates to 2%?

The Fed’s decision has increased the likelihood of a further rate cut.

Prior to the US Federal Reserve’s meeting last week, many believed that the Reserve Bank of Australia’s  easing cycle was complete after its decision to cut interest rates to 2.5% in August. However, many are now predicting the RBA board will be forced to cut the cash rate even lower when it meets in November.

Whilst the Australian dollar has remained strong against the US greenback for years, tourism operators and key exporters, such as BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO), have struggled for growth. As such, the RBA has been applying downwards pressure on the Australian dollar by lowering its interest rates.

It had managed to depreciate the Aussie dollar from around US$1.06 earlier in the year to below US90c, however, the dollar has crept back up past the US95c mark following the Fed’s decision to delay the taper of its bond buying program, prompting the need for further action.

That is the view of Macquarie chief executive Brian Redican, who believes that the RBA could drop the cash rate to as low as 2% before it officially finishes its easing cycle.

Whilst the strength of the dollar was certainly reliant on the Fed’s decision to begin tapering, Redican suggested that it was also being affected by strong news out of China. As “the tone of the data out of China has improved over the last six weeks or so” and is expected to continue over the next few months, the dollar is unlikely to find relief from this source.

Despite the notion that the board is finished cutting interest rates, it seems appropriate to think that the RBA may need to consider further cuts to continue pushing the dollar downwards.

Foolish takeaway

When the dollar increased after the Fed’s announcement, companies with heavy exposure to overseas markets, such as Cochlear (ASX: COH) and QBE Insurance (ASX: QBE), fell in value. It would be a risky move to lower interest rates further given the threat of creating a property price bubble, however, whilst there are a number of companies relying on a depreciating dollar, it seems that it would be a necessary move.

In times of heavy economic volatility, it is easy to become unnerved; however, there are still plenty of good long-term prospects. For instance, 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 owns shares in Cochlear.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for over ten years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of January 12th 2022

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

asx share price competitions represented by businessmen arm wrestling
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

person reading news on mobile phone
⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »