Another rate cut - what now?

It's down, down to record lows as the RBA focuses on low inflation.

The Reserve Bank of Australia has behaved as many expected, cutting interest rates by 25 basis points to 1.5 per cent in its August meeting. 

It was the second rate cut of the year, and as RBA Governor Glenn Stevens wrote in a statement: "The Board judged that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy." This was after taking into account moderate overall growth locally, low levels of business investment and low inflation – something the board noted "is expected to remain the case for some time."

The board believes a further cut will boost activity in the labor market, while on housing prices, it commented that growth in lending for housing has weakened, and that "the likelihood of lower interest rates exacerbating housing prices has diminished".

The decision saw a drop in the Aussie dollar, from US75.4c just after the 2:30pm AEST call to US74.99c. At 3:30pm AEST it settled to US75.29c. 

Meanwhile, the six day winning streak on the ASX looked to have been halted early on Tuesday afternoon – the ASX200 dropped from 5574 at the time of the decision to 5563, and is down 0.7% at 3:30pm, to 5546. *It then finished the day down 0.84% to 5,540 - see below for more. 

CBA was the first bank to pass on part of the cut to consumers, reducing its standard variable rate by 0.13% to 5.22%. Meanwhile, it raised term deposit rates: 

• From 2.45% to 3% for a one year deposit,

• From 2.6% to 3.1% for a two year deposit, and

• 2.7% to 3.2% for three years. 

National Australia Bank (NAB) moved second, passing on 10 basis points of the cut to bring its standard variable rate to 5.25%. It also raised term deposit rates, a move that interested Eureka's economist, Callam Pickering, who tweeted: 

For more on the role of inflation in the rate cut decision, read Callam's column and view our Macro Mondays video for a wrap of the week in finance - click here. 

Two cuts for 2016

Tuesday's decision marks the second cut in calendar year 2016, after the RBA sliced rates from 2% to 1.75% in May. The cash rate had remained stable in the 12 months to May – though it hasn't been higher than 3% since November 2012: 

Source: RBA. 

The RBA has made 12 cuts since November 2011, and the question for investors is whether this is the last one, or if Australia will follow other central banks towards rates of zero (or even lower). In a note this afternoon from CommSec chief economist Craig James, he observed: "We believe rates may need to fall a little further to prevent inflation remaining below the 2-3% target band. The bottom line is investors need to consider a range of investments to support income growth."

Market close 

While the local market had priced in a decision to cut, the ASX200 finished the day lower for the first time in seven sessions, declining 0.84% to 5,540. To read more, click here. 

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