Can the RBA save Christmas?

Economists predict RBA to cut official cash rates on Tuesday

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 December 3, 2012 12:04 pm AEDT

While most economists have factored in a rate cut tomorrow, concerns remain over whether it will be enough to get consumers spending.

Mortgage holders could receive an early Christmas present, with the Reserve Bank of Australia (RBA) predicted to cut official cash rates.

Consensus estimates predict the RBA will cut rates by 0.25% to 3% tomorrow, the lowest level since 2009, at the height of the global financial crisis. 19 of 28 economists polled by Bloomberg predict the RBA to cut rates, although almost all of them predicted a rate cut last month that didn't eventuate.

Falling commodity prices and concerns over the strength of the Australian dollar, which has refused to follow commodity prices down, have fuelled worries that our exporters are struggling.

The situation appears likely to get worse, with commodity prices unlikely to recover. The value of resource exports is expected to fall as a result, which will have an impact on Australia's terms of trade.

In addition, the unwillingness of consumers to spend locally means many of our retailers are also struggling to compete against offshore online shopping sites.

Should the RBA cut official cash rates, consumers will still be dependent on the banks, including Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank (ASX: NAB) and Westpac Banking Corporation (ASX: WBC), to pass on most, if not all of the cut.

Retirees with most of their assets in term deposits and bank accounts will be likely to see their incomes fall as the banks are likely to cut deposit rates, whether they cut mortgage rates or not. We've warned before about the death of high interest savings accounts. making dividend paying shares an attractive alternative.

Of course, the rate cut is not guaranteed, and the RBA is likely to review recent consumer spending patterns, as well as housing indicators and the economies of our biggest trade partners, before making its decision.

Foolish takeaway

As I mentioned back in September, if the Australian dollar continues to stay high and commodity prices aren't rising, the RBA looks more likely to cut rates sooner rather than later. Today's announcement by the Australia Bureau of Statistics that retail sales were flat in October, led by a fall in purchases of household goods, make it even more likely – but don't bet on it.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. 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.

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