RBA Rates Decision – April 2012

The RBA has held off on a cash rate movement again this month, as they still appear happy with the current economic activity within the economy. Those doing business in the two biggest state economies of Sydney and Melbourne might disagree about the level of growth they are enjoying! But it’s not the RBA’s job to set cash rates for each state; their role is a national role.

In this month’s interest rate commentary I am going to take a look at the current Euro-zone influence.

It appears the Greek bailout has achieved an immediate win in avoiding a GFC mark II event, whereby the credit markets (lending) have remained open, which is absolutely critical for the global economy’s ability to climb out of the hole created by the GFC mark I.

In a recent discussion on the topic I heard an excellent analogy describing how this whole Euro-zone debt management is playing out. The analogy was to imagine a solidly burning fire (Debt level) that has the ability to turn into a raging inferno (Global shutdown of global credit markets and a complete deterioration of all economies like that experienced in GFC mark I), so instead of trying to attack the fire front on, the strategy is to slowly remove some of the burning fuel in the fire (in this case an agreement by the bond holders to take a shave/hit on their investment). The outcome is a more manageable fire, which is now what we are seeing in Europe for the time being.

The hope is the fire will eventually burn itself out (Greece and other debt ridden country will continue with strong austerity measures and back their debts). Yet there is still a very real risk that the fire could once again threaten to erupt into an inferno if there is wavering support of this strategy and little evidence these countries such as Greece are not meeting their repayment obligations.

Certainly the RBA acknowledge the immediate threat of a Greek default or a Euro-zone collapse have been averted for the time being and in their view now looks less likely than it did at the start of the year. This is one of the reasons the RBA has decided to keep rates on hold for now.

What is more pleasing is if credit markets have more confidence in lending money, then the result is the cost of money should ease, resulting in less pressure on the banks to move their interest rates, as their internal margins hold up for returns to their shareholders.

It will also mean the RBA can once again start to focus on local economic data and events in forming their cash rate views in the coming months. Personally, I think we will see another rate cut to help stimulate our economy which is now growing at below trend rate (2.4%).

In the coming months I hope to focus some more light on the domestic drivers impacting the cash rate decision.

 

(Those people reading this should be reminded this is an opinion comment by Ben Kingsley, and should not be used when making decisions about financial matters without seeking further clarification and understanding of your own personal circumstances. This article is not advice you should rely upon. I recommend you speak to one of our licensed professionals before taking any action with your financial affairs.)