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RBA Rate Cut Still on the Cards

The slowdown in China and the volatile share market make it more likely the Reserve Bank of Australia (RBA) will further lower its cash rate this year with even the possibility of a federal election campaign cut.

Finsure Managing Director John Kolenda said it was no surprise to see the RBA at its first board meeting of 2016 leave official rates at the record low of 2.0 per cent.

But Mr Kolenda said a rate reduction is highly likely in the coming months.

“The RBA has a number of headwinds to negotiate this year which includes the downturn in China and instability in financial markets,’’ he said.

“I think we are still likely to see the RBA cut rates in the first half of this year or possibly in the second half of the year when the next federal election is scheduled.”

The RBA lifted official rates 25 basis points to 6.75 per cent during the November 2007 election campaign, when Kevin Rudd-led Labor toppled the long serving Howard government.

Mr Kolenda said easing by other central banks, including Japan which has cut its key deposit interest rates to below zero, could put further pressure on the RBA later in the year.

He said a major issue for the RBA to consider is that lower rates have become the  “the new normal” in the post global financial crisis (GFC) world with consumers now accustomed to them and likely to be highly sensitive to any future increases in rates.

“The GFC has changed society and consumers are generally more sensitive to economic conditions and interest rates movements, which the RBA hasn’t increased for more than five years,” he said.

“We have seen a dramatic change in consumer behaviour as they prefer to save money and spend wisely versus the credit spending frenzy for the decade before the GFC.”

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