Will the RBA give us a rate cut for Christmas?

Central bank must balance stimulus against rising home sales.

a woman

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The RBA paused its interest rate cutting in October for two reasons — first, to see if the effect of previous cuts would be enough to encourage consumer spending without overdoing it, and second, to avoid early housing market price rises from getting out of hand.

Each month the economists and newswires play "will it or won't it" to predict whether the RBA will cut again or keep rates as is for another month. They are split down the middle this time, with some saying we might not see another rate decrease until as far ahead as February.

Even from the US there is sentiment from bond manager PIMCO that an Aussie rate cut will happen in November, due to the mining industry's decline in investment taking away the momentum of a recovering economy. In 2012, mining investment as a percentage of GDP rose to almost 7%, so if that is projected to fall, then the central bank won't have that backstop to rely on.

Retailers and businesses would like at least one more cut before the Christmas shopping season to have consumers feel they can afford more purchases. If the commodities markets are flagging, and the Aussie dollar is back up to about $0.94 versus the US dollar, economic relief is in short supply.

Lower rates means more borrowing for homes, and that also means more consumer spending to furnish and accessorise these homes, so JB Hi-Fi (ASX: JBH), Myer Holdings (ASX: MYR), Harvey Norman (ASX: HVN) and David Jones (ASX: DJS) may all see an increase in sales.

Another advantage would be that the Aussie exchange rate will settle down, getting back to long-term averages, and Australian exporter prices will become more competitive. James Hardie (ASX: JHX) and Boral (ASX: BLD) would get a double effect of more overseas sales and having more new homes to supply building materials to domestically.

Foolish takeaway

When the RBA has only one major tool to brake or speed up the economy, it can't adequately cover all industries equally at the same time. Until the retail and service sectors can shore up the loss of mining investing, the desire to cut will be stronger than to start raising it.

Investors must think like buyers in stores. When you notice that more people are shopping and you yourself feel it's easier to buy, then you need to have your stock shopping list ready to buy.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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