100 Basis Point Interest Rate Cut – Hooray … Maybe

Yes, I was right and maybe Glenn Stevens, the RBA Governor does read this blog. I stated at few days ago that the RBA needed a 50 basis point cut to the official cash interest rate “like yesterday” – and today the RBA have cut it by a full percentage point. The cut puts the official cash rate now at 6% – slashed from 7% and  lowering the Australian lending rate from a 12-year high. This is great news for Australia and I would expect that within 2 years the RBA is going to cut official cash interests rates all the way down to 4.25%. This is simply because the cost of funding for banks at the moment is so ridiculously high.

By slashing the interest by a full percentage point – the RBA is hoping to reduce pressure pressure on banks and ensure that they remain profitable throughout this period of market turmoil. The ASX was down in morning trading today but shot up very quickly after the news was released and now is again in the black. As I stated in my last post:

Of course, the risk in all of this is that the Big Banks are not going to pass on any associated interest rate cut in order to sooth the pain of the huge losses from the USA market collapse, and the still very high funding costs. Unfortunately, this is not something that the market can directly control – other than to pressure the Federal Government to in turn, pressure the banks to fully pass on the cut.

This is still true of course, and despite their mega billion dollar profits – the banks should still pass on at least 50 basis points, or 0.50% cut, to their lending rates in order to free up some consumer dollars and assist big business in their interest costs. The focus now, of course, is going to be on the Australia Dollar and its plummeting value – something I think the RBA is not really looking at, at the moment – but will have to be in the coming months and importers feel the pain and exporters get rich (although maybe not if they have locked in their contracts until March 2009). While the free up in interest repayments is good for consumers, the cost of living may be on the increase as importers start hiking the cost of their goods up in order to match any associated losses with higher import costs.

I would watch this area closely. The Aussie dollar has taken a dive of more than 10 US cents in the past couple of trading days, was recently at 70.37 US cents, down from 71.97 just prior to the RBA’s shock move. Unless something changes in the market, I would think it’s going to go lower as other Asian countries start selling off the AUD because of future interest rate decreases.