I am sure the RBA never actually cheers for financial markets to fall, but undoubtedly there would have been a few knowing smiles exchanged this morning around the bank’s headquarters after yesterday’s rate cut was followed by some big falls on sharemarkets in Europe and Wall Street.
As the RBA made clear yesterday, while the situation in Europe had been improving in recent months, concerns about events on the other side of the world are clearly having an impact on Australian households.
“It is likely to be some time yet before concerns about the European situation can definitively be laid to rest and the effects of the recent turmoil on confidence may result in a period of precautionary behaviour by firms and households,” RBA governor Glenn Stevens said in his statement following yesterday’s 25-basis-point cut, which took rates to 4.5%.
The RBA statement paints a relatively good picture of the Australian economy. Inflation appears to be under control, the resources sectors and some related services sectors are booming, credit conditions have eased (although they do remain tighter than normal) and wages are under control.
But for all of that, economic growth remains subdued and the RBA appears to blame that on external factors. As well as its caution on the situation in Europe, it noted a slowdown in global trade, falls in commodity prices and a slowdown in the Chinese economy, where regulators have been trying to put the brakes on for some time.
The interest rate cut – the first since 2009 – could therefore be seen as the RBA’s attempt to help Australians forget about the situation in the European economy and concentrate on the reasonable economic conditions at home.
But will it work?
Definitely the rate cut is well timed. Consumer and business confidence has languished throughout much of this year, although there have been signs in recent months that both are returning. A rate cut before Christmas should help stoke those fires of confidence.
The rate cut will also be welcomed by businesses, mainly because it is recognition that not all parts of the economy are hurtling along like the mining sector.
Business expectations heading into 2012 are actually reasonable; a rate cut should allow companies to plan with some confidence going into next year.
But as this morning’s European falls showed putting the external economic situation to one side will not be easy for Australian households.
The relentless stream of bad news will continue – today, it appears the Greek government is close to collapse over the European Union’s debt deal, which will force even more austerity measures on the Greek economy.
Even if Greece is sorted out, Italy, Spain and Portugal have big problems. And we shouldn’t forget the US remains under severe pressure.
That may mean that further rate cuts are needed to help the Australian economy emerge from the long shadow cast by Europe.
Westpac’s chief economist Bill Evans, who tipped this rate cut well before many of his colleagues, says the RBA will cut rates by a further 75 basis points as part of this easing cycle, which suggest another three rate cuts could be coming.
He’s tipping the next cut will be in February, unless consumer confidence fails to bounce in response to this rate cut.
If there’s no bounce, a rate cut in December is on the cards, given there is no meeting in January.
All eyes will be on the consumer confidence reading due out later this month. It remains to be seen whether consumers will be swept away in the RBA’s gentle prod.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
