Cash Rate Cut May Hold Till August

Many things have attracted our attention in the year 2014 (right up to 2015), and low interest rate has certainly been one of them. When the measure was first adopted, it was seen as a government gimmick to bring back the economy from the mining sector to the property sector. The gimmick worked and how! Over the course of 2014, the cash rate kept coming down and even beat the financial market pundits a number of times.

Prophesy of cash rate cut

Fortunately, because we sailed pretty close to the intrinsic values of economy, low cash rates did not mount inflationary pressure either. NAB, which had earlier prophesied a rate cut in May, has now changed its predictions.

The bank feels that any further rate cut will only be a part of the RBA menu in August and for now the rates will hold out at 2.25%. Inflation, for the statistically inclined, is well within the RBA’s radar (2%-3%).

Reasons why the rates may hold at their present levels

The RBA governor feels that the cash rate could hold at levels it presently holds because of many reasons. 1) It is already near the plateau mark. 2) Household leverage is sailing pretty high 3) Property values are going from strength to strength. In fact, the NAB believes that if the economy continues with its buoyancy in highly anticipated sectors, the RBA governor may hold the cash rate at 2.25% in the month of August, too.

Unemployment rate and the performance of the commodity market

For those who keep tabs, it is certainly good news that the unemployment rate has come down from 6.7% to 6.4% over the last quarter. If the rate increases, the RBA will certainly need to barge in with a rate cut but that’s a decision for another day.

A trace concern is the performance of the commodity market as it directly impacts the Gross Domestic Product (GDP) of the nation and the news from the centre is that the GDP is not showing a healthy trend (3% forecast for the year ahead).

What is your take on further cash rate revision?