With less than a week till next Tuesday's Reserve Bank of Australia (RBA) board meeting, the market has turned its attention, once again, to the likelihood of a cut.
The RBA has held the rate steady at 3% so far in calendar year 2013, with the last reduction in the official cash rate occurring at the December board meeting. With inflation running at a tame 2.5% and economic conditions soft at best, economists and market commentators appear to be forming the view that a further cut is increasingly likely.
Should the RBA decide to cut rates, most likely by one quarter of one percent, to 2.75%, this would probably lead to a fall in the Australian Dollar (AUD) as foreigners decrease their demand for the AUD. A weaker AUD is a positive for some Australian companies but a negative for others.
A weaker exchange rate will boost exporters with exposure to the AUD such as Cochlear (ASX: COH) who earn the majority of their revenues outside of Australia but translate those funds back to AUD. On the flip side, importers who have been benefiting from the strong exchange rate, such as Premier Investments (ASX: PRV), the owner of retailer Just Jeans, will have to deal with an increase in off-shore manufacturing costs.
Exporters are not the only ones to gain from a cut in official interest rates. The domestic property market, including building stocks could be beneficiaries as well. While there is an over-riding issue of affordability in the Australian property market, lower borrowing costs should provide some benefit to building supply companies such as Boral (ASX: BLD) and Brickworks (ASX: BKW).
Foolish takeaway
It might be just a little too Foolishly clever to attempt to front run the RBA's rate decision — we'll know soon enough anyway! However, the rate decision does ultimately affect the cost of money and that ultimately affects all companies.
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The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, 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. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.
