Will the RBA cut rates further?

Central bank under pressure and walking a fine line

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 September 19, 2013 3:12 pm AEST

With the Australian dollar shooting through the US 95 cent mark today, the Reserve Bank of Australia (RBA) could be forced to cut rates further.

The central bank has noted a number of times that the Australian dollar was higher than it would like, and the US dollar could keep falling, push up our dollar even further. A higher Australian dollar makes it harder for our exporters to compete globally, while also making imports more attractive.

The RBA last cut the official cash rate by 0.25% to a record low of 2.5% on August 7, this year, partly in an effort to depreciate the high Australian dollar. Since April 2013, when it rose above US$1.05, the dollar had fallen 15% to below 90 US cents in August.

With US stimulus likely to continue at US$85 billion a month for the foreseeable future, the US dollar is likely to depreciate against most major currencies, and we could see the 'Aussie' back above parity in the near future.

But the RBA has to balance further rate cuts with rising property prices. Lower interest rates encourage more buyers to take out mortgages to buy more property, pushing up property prices even further. While the central bank doesn't believe that Australia is experiencing a property bubble, further rate cuts could see house prices rocket upwards, potentially leading more people to use the rising equity in their homes to load up on debt to buy more property.

Additionally, it seems the rising self-managed superannuation sector with around $500 billion of assets is looking to load up on property.

Already there's talk that Australia's central bank may have to follow the lead of its New Zealand counterpart, and place a cap on mortgage loan-to-valuation ratios, to try and limit property 'speculation'. But the big four banks ANZ Bank (ASX: ANZ), Commonwealth Bank (ASX: CBA), National Australia Bank (ASX: NAB) and Westpac Banking Corporation (ASX: WBC) have warned that any cap would only hurt first-home buyers, and not impact heavily on property investors.

Foolish takeaway

When it comes down to it, the RBA is unlikely to cut rates further, just to lower the Australian dollar and risk creating a property bubble. Instead, exporters and Australian companies with offshore operations look likely to suffer, as the Australian dollar rises to parity with the US dollar.

Interested in a dividend-paying stock that's not a bank? Discover The Motley Fool's favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of "The Motley Fool's Top Dividend Stock for 2013-2014."

More reading

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

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.