Interest rate cut cheers small businesses

interest rates

The Reserve Bank (RBA) has cut the national interest rate to 4.25 percent, the second consecutive cut it has made in its monthly meetings—the first back-to-back monthly cuts since April 2009.

In a welcome move for retailers and consumers leading up to Christmas, the RBA lowered the cash rate by 25 basis points.

RBA governor Glenn Stevens, said that “the inflation outlook afforded scope for a modest reduction in the cash rate”.

Federal Treasurer Wayne Swan added: “Today’s decision to cut interest rates again will provide Christmas cheer to families and small businesses.”

The rate cut is welcome news for a hurt retail sector barely buoyed by the gift-buying season, and is also reflective of the edgy debt crisis in Europe, where the economic forecast remains gloomy.

However, Ken Raiss, director of national accounting firm Chan & Naylor, called today’s rate announcement a double-edged sword. “For some people this will confirm that the Australian economy is heading the same way as Europe and their knee-jerk reaction could be to tighten their belts further than they already are. This will of course further detract funds from equity markets and sectors such as retail, which are already hurting.

“On the other hand, an interest rate reduction will release additional cash flows towards low capital growth within investment properties. This will allow more savvy investors an opportunity to selectively target properties that are yielding good returns and higher end capital growth for when the property market inevitably improves.”

Paul Bloxham, chief economist at financial institution HSBC, said inflation had “clearly surprised on the downside” and predicted that external events would shape future RBA decisions.

“With inflation in Australia expected to remain comfortably in the target band, the path for RBA rates from here will be mostly determined by the global outlook and risks,” he said.

It is as of yet unknown how much of the cut will be passed on by the various banks.