10/04/2001 - 22:00

Is interest rate cut going to be enough?

10/04/2001 - 22:00


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THE cut by the Reserve Bank of Australia to the cash rate of 0.5 per cent has taken a few analysts by surprise.Some economists have suggested that the RBA has gone too far with the size of the cut.

Is interest rate cut going to be enough?
THE cut by the Reserve Bank of Australia to the cash rate of 0.5 per cent has taken a few analysts by surprise.

Some economists have suggested that the RBA has gone too far with the size of the cut.

I am not surprised, having forecast this rate cut would be the very least that would be expected.

The anecdotal evidence certain-ly supports the view that business is hurting out there.

Also the housing industry can vouch for the fact that it is hurting just as much.

Leaving aside the anecdotal evidence when you look at the statement from the Governor of the Reserve Bank you can follow their reasoning.

In the latest statement the Governor says: “The board re-mains firmly of the view that the economy’s medium-term growth prospects are very good, but recognises that two risks to short-term growth exist.

“The first comes from the weaker world economy. Against this, the exchange rate gives a major competitive edge to the trade sector.

“The second risk is that, notwithstanding strong medium-term prospects for growth, confidence could weaken in such a way as to further dampen domestic demand in the short-term. The board views it as prudent for monetary policy to help support domestic demand under such circumstances.”

When you go back to the RBA’s statement in March when it made its previous decision to cut rates it said: “Prospects for the inter-national economy have deter-iorated further.

“In the United States confidence has continued to decline, and new data in Japan has presented a distinctly weaker picture in recent months.”

In that statement it also says: “The board believes that the Australian economy should show considerable resilience, even if the world economy is weaker.

“Despite recent falls, business profitability is still high, corporate balance sheets remain in good shape and credit is freely available.

“Unlike earlier expansions, the present one has not led to significant rises in price or wage inflation, clearly over-valued asset prices or over investment and excess capacity.”

So while it remains optimistic about the longer-term prospects for the Australian economy, it is mindful of the fact that the world economy remains totally in the doldrums.

Last month it took the view that the Australian economy would remain resilient and be able to sustain the growth rates of the past.

In the space of one month it has reviewed its position in regard to the Australian economy and now is far less optimistic about its prospects.

The consistent theme that it does carry through from last month’s statement to this month’s state-ment is that there is little or no threat to the rate of inflation or wages costs in Australia.

This is rather self-evident and will give a considerable boost to business to know that the 1980s’ bogey of inflation and asset-price rises that were unjustified are no longer a threat of any kind.

The position that the RBA is taking in regard to interest rates is not good news for the dollar, however.

As it quite rightly points out the falling Australian dollar has been good for the traded goods sector.

The fact is that the exports turnaround has been stunning over the past two months.

This is directly attributable to the falling dollar.

Already we have seen the trade balance go to surplus and this is expected to flow through to the Current Account Deficit.

When the CAD does turnaround the dollar could well start its climb back to reasonable levels.


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