Stocks Fall on RBA Rate Cut Announcement

The RBA announced at 2.30pm yesterday afternoon yet another cut in the cash rate — to 1.5%. It signals that the RBA is running out of ammunition, and also out of ideas.

And what did the stock market do off the news? It fell over 40 points, as it became obvious that the RBA is more worried about the economy than the government or market is. Now it’s the market’s turn to worry.

It’s not the RBA’s fault. Trying to run an economy on just monetary policy is never going to work — something it’s been forced to do for close to a decade now. What’s needed is a big dose of fiscal policy — things like tax reform and reviewing government expenditure. But don’t hold your breath on that one.

If you went through the various term deposits available from the big four banks this morning, you would have seen that an investor could get around 2% if they invested $100,000 for 10 or 11 months. Invest it over 12 months, and the rate improves to 2.45%. Still a pittance, and that was before the latest cut.

As the global hunt for yield accelerates, a big chunk of money is finding its way to our shores to access our relatively higher interest rates. And it’s just that — relative. While the yield on an Aussie 10-year bond is hovering around 1.84%, the equivalent bond in Japan is on a yield of -0.11%. So an international investor is 2% better off putting their money in Australia.

And therein lies the problem — this impact on our exchange rate. Before overseas investors can invest their money here, they need to change their own currency into Australian dollars. The RBA is no doubt worried that if our exchange rate gets too high, it could put a hand-brake on our already insipid economy.

And no doubt that’s why the RBA moved on rates yesterday.

Monetary policy is always going to have its limitations; interest rates can only do so much. The real impact, though, is on the millions of savers and retirees, and the ever growing need to find other ways to supplement their income.

It’s also why more money will continue to find its way into the stock market as investors are forced to find other ways to eke out an income.

The RBA is going to cop a lot of flak on this one. But the real problem lies in that much bigger building just down the road in Canberra.

Matt Hibbard

Money Morning Australia