Part 1 of a 2 Part Report (read Part 1)
Yesterday’s rate cut of 75 basis points 0.75%) was the right decision by the Reserve Bank of Australia (RBA). Fifty points (0.5%) definitely would not have been enough after the release of some of the worst economic data in many years. I had predicted in an earlier E Magazine that the cut would be approximately 100 basis points (1%) but the Reserve Bank chose the 75 point cut – maybe concerned that two consecutive monthly cuts of 100 basis points (1%) would look like panic.
After the October rate cut of 100 basis points (1%) the markets enjoyed a short lived spike but since then shares have fallen 11%, the dollar 8.2% – in fact since July the Aussie Dollar has been in freefall from around US98 cents to around US66 cents and every piece of economic data since has shocked on the downside.
So, the October interest rate cut was a huge success – just no Australian seems to have benefited. The new conversation points from the Reserve Bank Governor are China’s economic slowdown, significant weakness in industrialized countries and weaker domestic spending than expected. “.
The Reserve Bank has blood on its hands – they have run monetary policy with a single inflationary vision. Australia has been exceptionally fortunate to benefit from the age old reliance on digging up the country – the resources boom.
The problem is that metal prices are down about 35% this year and coal is down around 50%. Given that entrepreneurship is barely encouraged in Australia and schools teach children to get a job and become employees, what is next for the country?
Last night a US central banker used the word “deflation” and told Bloomberg that there would be no growth in the US next year and that inflation had been “vaporized” – meaning that prices are likely to fall for a period of time. Our Reserve Bank couldn’t see this coming and see that this might affect us?
The fact is that the RBA has been caught with rates way too high and their obsession with controlling inflation is now backfiring as Australia “suddenly” heads toward a recession. The foresight of these people are in line with the “fat cat executives” who suddenly work out that their companies have no money – with all of the models and supposed analytical data at their disposal they seem to find it difficult to look out the window let alone ahead several months..
The official cash rate should be another 1.5-2% lower (at least) than it is now. NSW is a basket case of a State and is in recession – the only Australian State that is – but who will be next to follow? New Zealand is in recession, so is Japan – but the RBA was caught off guard. How?