Time for the RBA to cut Australia’s interest rates

October 4, 2011

RBA and Interest Rates

It’s RBA day today and while the Bloomberg survey of 21 market economists finds that none think the RBA will cut rates today I reckon it is time they did. The Australian economy is just not as strong as the RBA had thought as recently as May and June. The inflation outlook is nowhere near as dire as they had factored in either. The recalibration of the CPI told us that in terms of the official figures and the TD-MI monthly inflation gauge is clearly showing the trend in terms of inflation has turned in Australia as you can see below.

The massive correction in commodities prices that we are seeing and the rerating of the growth profile not just of the developed world but of the BRICs as well is also telling us something about global demand but equally about global inflation.

 So what is the RBA worried about?

They have told us in the past that it was concern that the mining boom would wash through into spending and inflation throughout the economy. This is not happening as we have discussed many times in this space. Deposit growth in the Australian Banking system is through the roof at the moment which speaks of slowing velocity of money, lower aggregate demand and ultimately less inflation – you can’t charge more even if it costs more if no one wants to buy.

But the big reason I reckon the RBA needs to cut to reacquaint the Australian Dollar with its job.

That is the Australian Dollar is supposed to be our automatic stabiliser and as I illustrated in yesterday’s Australian Dollar article, even though it sits at 0.9527 presently it is not selling off  as hard or as fast as we would normally see it in order to stabilise the other negative forces that are hitting the economy.

We have a Government and opposition committed to deficit reduction, we have a household sector committed to austerity Australian style paying down debt, reducing demand and spending less and we have a currency that is at risking of sitting uncomfortably high given the global macro economic settings and outcomes in train. Not to mention the national economic weakness and uptick in unemployment that is happening at present.

It is a looming economic disaster.

That’s all before we talk about Europe, global equity markets and sovereign debt problems. uncertainty is rising. 

So, what are the risks to an RBA rate cut?

Will it reignite the housing boom like we saw in 2009? I doubt it given the new found love affair with saving and debt reduction. Australians understand better than they did in the past the risks associated with too much personal leverage.

Will it reignite a spending boom and cause inflation? As with the above I doubt it but at the margin it might relieve some pressure and thus cash to circulate through the economy but without igniting home grown inflation. A stabiliser if you will rather than an uplift.

Will it cause the Australian Dollar to fall precipitously? Probably not – ceretainly it will reinforce to traders and investors that the Dollar is not a one way bet and we might see my 0.9200 initial target a bit sooner than I anticipated. But the point is the economy needs the Australian Dollar a little lower given all that is going on both within and without the global economy.

An RBA rate cut today would be an unexpected but inspired decision.

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  1. RBA opens the door to rate cuts – not guaranteed though. | Lighthouse Securities - October 6, 2011

    […] what we talked about in yesterday’s piece – falling and much more quiescent inflation coupled with a weakening Australian economy and […]

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