Rate cut winners

That's if the banks pass on interest rate cuts

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published October 3, 2012 10:34 am AEST

Yesterday's decision by the Reserve Bank of Australia (RBA) to cut official interest rates by 0.25% to 3.25% is likely to give local retailers a boost. While the major banks have yet to move to cut their interest rates, its highly likely that they will do so in the coming days, especially after the Federal Treasurer, Wayne Swan, urged the banks to pass on the full rate cut. Bank of Queensland was the first of the regional banks to move, passing on 0.2% to its home loan customers.

If the banks do cut rates, many homeowners should see their mortgage repayments fall slightly, allowing them a little bit of extra breathing space, and perhaps extra income to fund some of those luxuries they've done without. Coming up to the Christmas holiday season, that could be good news for consumer discretionary stocks such as JB Hi-Fi Limited (ASX: JBH), Premier Investments Limited (ASX: PMV), Nick Scali Limited (ASX: NCK) and Kathmandu Holdings Ltd (ASX: KMD).

We reported yesterday that some retailers are stocking up on inventory as they expect higher sales in the last quarter of the year, and want to ensure they have enough product to meet demand. Heavy discounting is also expected to feature, giving consumers an additional reason to go out and spend.

Additionally, many economists are expecting further interest rate cuts in the next six months, which should provide additional spending stimulus.

However, not everyone thinks the rate cut will prompt consumers to go out and spend. The main reason the RBA cut rates was on concerns over China's slowing growth, Europe's lingering sovereign debt issues, and the high Australian dollar. While the dollar has fallen slightly, Europe's woes still exist, and consumers may still be worried about the fallout from China cutting back on buying our resources and energy. That may prompt many Australians to keep their hands in their pockets for a while yet.

Foolish takeaway

It will be some time before the effects of this rate cut show up in the local economy – and may have very little effect, should the banks refuse to pass on at least some of the rate cut to customers.

If you're in the market for some high yielding ASX shares, look no further than our "Secure Your Future with 3 Rock-Solid Dividend Stocks" report. In this free report, we've put together our best ideas for investors who are looking for solid companies with high dividends and good growth potential. Click here now to find out the names of our three favourite income ideas. But hurry – the report is free for only a limited time.

More reading

Motley Fool writer/analyst Mike King owns shares in JB Hi-Fi. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Automatic Renewal

By taking up this offer, you will also be enrolled in our auto-renewal program, which is our way of making your ongoing subscription easier by ensuring uninterrupted service. Don't worry, though – you're not locked in, and can cancel your auto-renewal at any time before each 'anniversary' date without question or penalty.