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May interest rate market update

The Reserve Bank of Australia (RBA) has surprised the market with a 0.25% drop in the official interest rate, taking the cash rate down to an all-time low of 1.75%. The RBA has viewed the recent bout of inflation as a risk to the economy and has taken action to stimulate further growth.

In what has been a shift in both economic data and the RBA’s stance of maintaining a steady cash rate, there is now a reasonable chance of another rate cut in the future.

“Interest rate moves are a bit like cockroaches — if you see one there is usually another one lurking nearby”
Dr Shane Oliver – Head of Investment Strategy and Chief Economist, AMP Capital.

It appears that the RBA is targeting two outcomes with its monetary easing strategy – to drive the dollar to lower levels and stimulate inflation and growth. A lower Australian dollar will help to drive the export market by making goods and services more competitive to overseas buyers. We’ve already seen an increase in the education and tourism sector. As worldwide growth is low, Australia has to increase market share rather than just relying on organic growth.

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