8 Reasons why the RBA should cut rates today

February 7, 2012

RBA and Interest Rates

I could write many words about why or why not the RBA should cut rates today but it is probably just as reasonable to list the core reasons I believe that the RBA should cut.

They are:

  1. Households still delevering – check out this chart, we’ve hardly even made a dent in household debt. De-leveraging is a structural necessity. This is going to weigh heavily on the domestic economy for some time.
  2. Retail sales are crap – there is no other way to put it. the data yesterday was pretty poor and while the chart below from the RBA’s chart pack doesnt show the latest negative result (-0.1%) for December the reality is that retailing continues to suffer under the weight of de-leveraginig and the high Aussie Dollar.
  3. Aussie Dollar up – please see my other post today on the impact of this but for every book you buy on Amazon, holiday you have in Thailand or other benefit that acccrues to the household sector from a high Aussie the fabric of the economy is being weakened.
  4. Employment in Australia is not going anywhere – the market focusses on unemployment but i like to look at employment because it gives me a raw feeling for job creation in the economy. As you can see its stalled and my sense is that with the above 3 factors we are going to see job losses.
  5. Inflation is not a threat – indeed it is moving still in the right direction.
  6. Bank Funding costs are rising pressuring their net interest margin – even after all the extra hikes they are still well below a decade ago. The risk is of course that the RBA cut will not be passed on in full. Equally however the risk is that banks put rates up if the RBA doesn’t cut rates in the next few months.
  7. Banks non-performing assets are rising – this suggests economic weakenss is biting in the economy.
  8. The global economy is still weak – even with the US’s nascent recovery.

Of course the counter arguers will look to the ANZ Job Ads yesterday and the fact that Europe hasnt blown up as reasons to wait. On the ANZ Job Ads let me say this – a senior Australian Market economist last year said to me when the Job Ads were suggesting something different to my calls for no hikes that that person would bet his career on the Job Ads – lucky they didn’t take the bet.

On Europe I would say my thoughts last year about no hikes and then about cuts were never predicated on Europe or the potential for a blow up – that was just another weight on a domestic economy hamstrung by debt, de-levaging and a high Aussie Dollar.

We’ll find out at 2.30pm today if I’m right. For the economies sake I hope I am.

Have a great day

www.twitter.com/gregorymckenna

Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. Thus, this blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation

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