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Rate cut unlikely to stimulate economy

By Staff Reporter
Ribbon house
4

Uncertainty surrounding the Federal Budget could reduce the positive impact of the recent cash rate cut, with one commentator warning the RBA may have been better off leaving rates on hold.

Mortgage broker network 1300HomeLoan managing director John Kolenda said the Federal Budget’s impact on the domestic economy is likely to overshadow any positives resulting from the RBA’s decision to cut the cash rate from 2.25 per cent to just 2 per cent.

Mr Kolenda said the RBA reduced the cash rate by 25 basis points in an effort to boost business and consumer sentiment and stifle the Australian dollar but warned that it may not be enough.

“With so much uncertainty about what will be delivered by Treasurer Joe Hockey in next week’s budget, this latest rate cut may not give the domestic economy much of a boost,” he said.

Mr Kolenda said despite assurances the 2015 Budget will be more reasonable and fair than last year’s offering, there have also been forecasts of a major blowout in the federal fiscal position. This, he said, had created uncertainty around whether tough measures will need to be implemented.

In light of the looming uncertainty, Mr Kolenda suggested keeping rates on hold in May could have been a safer option.

“The RBA may have been better off hanging on for another month and assessing the impact of the Budget,” he said.

“The latest rate cut also flirts with the potential dangers of further overheating the property market, particularly in Sydney

“The other concern is the impact on the big four banks of a possible downgrading of Australia’s triple-A credit rating. This might force [the banks’] ratings to be cut while also lifting their funding costs and hampering access to offshore cash.”

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