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Interest Rate Cuts

As rate cuts go, 1% is a big one, frankly four times bigger than most economists (who in the main were predicting a series of rolling 0.25% rate cuts through into next year) were expecting and the biggest since May 1992.

The RBA was clear in its rationale – the Australian economy is slowing down as are the economies of our Asian, European and American trading partners, so to overcome this, and to stimulate lending they are making money cheaper to get a hold off, while boosting the attractiveness of our exports.

There are three great reasons for making money cheaper to access;

• First is that it eases the cost to people and businesses that have borrowed money – allowing them to spend some of the money otherwise going to interest payments
• Second, is that it encourages people to borrow more, naturally, because debt is more affordable, and
• Third is that it makes saving cash less attractive. By making cash less attractive it means some of this money will be invested elsewhere into either shares, businesses or pumped back into the economy as spending.

The problem with making money cheap is that it stimulates inflation and the RBA has stated that CPI inflation is likely to peak at 5% in 2009.

The major Australian banks have agreed to pass on a cut of 0.8%.

What does this mean?

The same as it has for the last ten months;

• Do not make rash decisions
• Watch your money wisely
• Contact your financial advise to discuss your position

 Contact your adviser at Aperio Financial Solutions on 1300 798 161