Reserve Bank of Australia (RBA) cut interest rate to historic low of 2.25% on 4 February 2015.

You must have read these headlines in almost every Australian newspaper. While this is not the first time that RBA has reduced rate and also given general awareness of australians about interest rate (Thanks to our love for the great Aussie Home and not so much love for mortgates linked with it); some may wonder how it helps my business.

Yes, it certainly helps in reducing mortgage instalments (Provided the bank passes on the benefits, which they all did this time round) but what one can expect to happen for a business owner. Well, in my mind, there are two ways, it can help a business owner.

First one is easy to explain. As banks reduce interest rates for home owners, they do so for business owners as well, not always though. On this occasion, 3 of the 4 big banks have passed on the full benefit of lower interest rates to businesses. As of 16 Feb, NAB and ANZ have passed on the full rate cut to businesses only backed by residential property. So as you see, not all banks have passed blanket rate reduction to all business owners, still there is some reprieve form interest bill for some business owners.

Secondly when RBA reduces interest rates, Australian investments go out of favour for global investors. They pull their money out of the country which reduces demand for A$ and thereby its conversion rate in foreign currency (say U$$). How low A$ helps local business. Well, imports get dearer which in turn helps local goods to get their demand back thereby helping local businesses.

RBA has been trying to reduce the value of A$ in foreign currency terms and it has succeeded to some extent as A$ which was fetching 0.93 U$$ almost 6 months ago; is now helps local businesses and improves their sales, thereby a better returns for their capital and efforts.

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Disclaimer : DSV partners in not an FX trader but provides accounting, taxation and business advisory services. DSV Partners does not take any responsibility for any reliance on the information contained herein and all the information are correct as at the date of writing this article, being 16 February 2015.