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Why the cash rate could fall to 0.5 per cent sooner than you think

RBA

The RBA could continue to slash already record-low rates to ensure the Australian dollar does not appreciate and weaken our export opportunities, which would see the banks take a hit.

Speaking with Nest Egg, Canstar’s group executive of financial services and chief commentator, Steve Mickenbecker, discussed the Australian economic outlook. 

If the rest of the world continues to cut its rates, Steve Mickenbecker believes Australia will need to follow.

“Australia would be faced with quite a problem if [the United States] have a 1 per cent cut, then our dollar could appreciate against the US and that’s the last thing we want at this stage.

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“[The Reserve Bank of Australia] might feel it needs to chip another 50 basis points off our rates as well, which puts Australia at risk of zero interest rates,” said Mickenbecker.

Why we need a weaker dollar

Despite sounding like a good thing for the economy, a strong dollar could actually be a disaster for the Australian economy. Exports and import competing businesses suffer if the dollar appreciates due to the increase in purchasing costs for consumers.

Australia’s three biggest sectors in its economy are mining, tourism and education. All three of these sectors have one thing in common, they all benefit from a weaker Australian dollar as they make it more attractive for foreign nations to consume these goods.

“Our exports become less competitive, and import competing businesses, such as tourism and education, diminish.

“People will choose New Zealand, Canada or the United States for education if the [Australian] dollar rises.”

ADIs will feel it

Authorised deposit-taking institutions or ADIs are required by law to have a percentage of funds through consumer savings as it is seen as safe debt.

As interest rates continue to fall, these ADIs will find it increasingly difficult to secure this funding. 

“The banks are going to struggle if rates gets any lower as well. There’s a point at which it gets harder to adjust rates. I think they are already there. The banks are only paying 0.3 per cent on there saving rates,” said Mr Mickenbecker.

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Why the cash rate could fall to 0.5 per cent sooner than you think
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