The RBA cuts cash rate by 25 basis points

The Reserve Bank of Australia has today cut its cash rate by 25 basis points

Key Messages 

• 25 basis points (0.25%) cut to RBA cash rate announced today
• Cut appropriate, with more to come.
• What will the Banks do?
• Businesses should take particular interest in their cash flow cycle

The Reserve Bank of Australia has today cut its cash rate by 25 basis points (0.25%) to 3.50%. This is based on what the RBA describes as “modest domestic growth and a weaker and more uncertain international environment”.  The RBA also notes a further slowdown in the housing market and precautionary consumer behaviour.  For the full statement by Glen Stevens go to: (http://www.rba.gov.au).

The 0.25% cut had been priced in by the markets, with some speculation of a 0.50% rate reduction.  The RBA is clearly wanting to keep some of its powder dry should it need to act decisively in the event of a significant economic slowdown. 

I support the move by the RBA and expect further cuts to come.  Respected economist Bill Evans of Westpac has said that he expects rate reductions of up to 1.0% over the next 12 months.  I agree.  Our clients continue to tell me that customers in many sectors of the economy are sitting on their hands not willing to overspend now nor to commit to future expenditure that is non-essential.  Almost daily stories of European woes and more recent worrying data from the U.S. is adding to the negative sentiment.   Recent corporate collapses and announcements of redundancies, whilst small in an absolute sense, are also fuelling the sense of caution.

The real test now is how the banks will react and I’m watching with great interest as to how much of the cut will be passed on.  Around two thirds of the last cut of 0.5% was passed on by the “big 4” banks.  As I write, Bank of Queensland has indicated a 0.20% reduction in their variable home loan rate (80% of the RBA cut of 0.25%).   

As I have said before, whilst a cut in rates will be good news for business owners, it is nevertheless a reminder of the importance of cash flow and managing and measuring business success less by the profit and loss statement and more by hard-nosed cash inflows and cash outflows.  Business owners should take the time to carefully track their existing and forecast cash flows and be prepared to act early if positive flows don’t eventuate as planned.