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How the Interest Rate Cut Will Affect NFPs


17 November 2011 at 9:53 am
Staff Reporter
CBA Finance News | The Reserve Bank delivered some welcome relief when it reduced interest rates during Melbourne Cup week. Commonwealth Bank economist James McIntyre takes a look at what the rate cut means for the Not for Profit sector in this week’s CBA Financial News.

Staff Reporter | 17 November 2011 at 9:53 am


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How the Interest Rate Cut Will Affect NFPs
17 November 2011 at 9:53 am

This article is by Commonwealth Bank economist James McIntyre is part of a regular series of articles by the Commonwealth Bank, who will be using their financial experts to provide news, insight and expert advice for Not for Profit organisations.

The Reserve Bank of Australia (RBA) delivered some welcome relief when it reduced interest rates during Melbourne Cup week. Interest rates have been changed on seven out of the last nine Melbourne Cup day outings (up five times, down twice). This time around the cash rate was cut by 0.25% to 4.50%.

So what does the RBA rate cut mean for the Not for Profit sector?

• Lower interest rates will go some way to easing borrowing costs for Not for Profits, as well as struggling households.

• At the margin, some of the pressure on households will be dialled back, potentially easing the impacts on those Not for Profits assisting households in direct financial stress, or indirectly through counselling services relating to financial distress.

On the flip side though;

• The operations of many Not for Profits are supplemented by earnings on reserve funds. Interest rate cuts reduce the earnings on savings, in order to encourage spending. If further rate cuts are forthcoming, many Not for Profits may need to review their investment strategies to ensure their portfolios are generating sufficient excess funds to continue supporting their benevolent activities.

• Whilst lower interest rates are of benefit to those members of the community with debts, they reduce the incomes of households living off their savings, such as retirees and pensioners. This could see a shift in demand for financial assistance from those with high debts, to those struggling to live on reduced incomes.

Characterisations of a two-speed, three-speed, and patchwork economy are common of late.

But conditions across the economy are never uniform. Growth differentials are part of the economy’s constantly evolving structure and shape. Whilst the mining, and even some sectors of the non-mining economy, are booming, the easing of monetary policy should provide some support to those sectors that have recently been experienced weaker conditions.

The reason for the rate cut was that the RBA had reviewed its assessment of the outlook for economic growth, and inflation. The RBA Board considered that rates were higher than what was required to keep inflation within the 2-3% target band.

Recent inflation figures have been lower than expected, opening the door to lower rates. And the ongoing uncertainty in Europe has dented consumer and business confidence, potentially dampening economic activity here in Australia. Both of these factors were incorporated into the RBA’s revised growth forecasts, published in the November Statement on Monetary Policy.

The RBA’s revised forecasts have growth at a trend-type pace, and inflation in the middle of the target band. That sort of outlook doesn’t suggest the RBA is in a hurry to cut rates further. But that sort of forecast is one that won’t stand in the road of further reductions if necessary. We think that a further cut is likely early next year, given the continuing deterioration in Europe.

 

 

Keep up-to-date with all the latest NFP Finance News from the Commonwealth Bank at probonoaustralia.com.au/news/commonwealthfinance

Disclaimer: Important Disclosures and analyst certifications regarding subject companies are in the Disclosure and Disclaimer Appendix of this document andatwww.research.commbank.com.au. This report is published, approved and distributed by Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945.  



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