Tuesday, August 02 2016
The RBA announced a further 0.25% rate cut today. Low inflation and slowing housing growth provided the RBA the flexibility to lower interest rates to support growth. While the market was anticipating the rate cut and therefore the reaction is muted, we note the following implications:
- The cut provides broad support for equities given the gap between dividend yields and cash rates remains wide.
- A cut places further pressure on the currency given interest rate differentials are narrowing. This is positive for stocks with offshore earnings and for exporters but might limit enthusiasm from offshore investors for the Australian market. Positive for Treasury Wine Estates (ASX:TWE), SKYCITY Entertainment Group (ASX:SKC), SEEK (ASX:SEK), Macquarie Group (ASX:MQG).
- Commonwealth Bank (ASX:CBA) has announced they will only pass on half the rate cut to mortgage holders. While this initially looks positive for the banks we note the banks funding costs will be higher as they will need to retain attractive TD rates to grow deposits. Lower interest rates will reduce risk of bad debts, so overall it is mixed from a banks perspective.
- Domestic cyclical stocks and small business should benefit. There will be more money available for consumers (Tatts Group (ASX:TTS), Woolworths (ASX:WOW), other retailers) and it might extend the property cycle (or at least assist with settlements).
Low inflation suggests a further rate cut is likely.
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