On the 2nd of July we saw the Reserve Bank cut the official cash rate again by 0.25%, pushing rates down to a new record low of 1%.
But despite those all-time lows we believe investors can expect rates to fall even further.
The RBA’s decision to cut rates follows its move to lower rates by 0.25% to 1.25% in June – the first cut since August 2016.
The RBA is concerned that unemployment is too high. It wants to reduce unemployment to stimulate wages growth and inflation. The June cut was unlikely on its own to achieve that objective.
The RBA will probably now sit back and wait to see the impact of the two cuts they’ve put through in the past few months.
But we do expect another cut later this year and then probably another cut early next year, ultimately taking the official cash rate down to 0.5%.
There are a number of reasons why we believe more cuts are on the cards:
All of those factors will keep economic growth somewhat constrained and therefore ultimately see the RBA cut interest rates further.
While recent gains in Australian shares leave them vulnerable to a short-term pullback, we remain optimistic on shares on a six to 12-month view, in part due to easing by central banks like what the RBA is doing now.
The likelihood of further RBA cuts to the official cash rate, taking them as low as 0.5%, means cash and bank deposits are likely to produce poor returns.
And with the RBA set to cut rates more than the US Federal Reserve, the $A is likely to fall further to around US$0.65 this year.
So, while the latest RBA decision to cut rates has seen them fall to record lows, investors should consider factoring in even more cuts in the next six to 12 months.
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