RBA Rates Decision – December 2011

Although there were plenty tipping this rate cut including the money markets, the RBA’s move to cut rates by a further 25 basis points came as a surprise to me given the minutes of the November meeting suggested it was a close call that we got a rate cut on Melbourne Cup Day. The messages from the RBA following the November cut, was that its November adjustment better aligned the cash rate to the changing of the economy to a more subdued outlook.

So this move concerns me a little about the overall confidence the RBA has in the Australian economy and our near term outlook. We can thank the basket case that is Europe for this rate cut, as the supporting notes issued by the RBA today make light of the flow on effect this is having in Asia.

Friday’s meeting of the minds in Europe could signal a turning point in a positive direction for the Euro nations, which resulted in the mini share market rallies across the global markets last week. Solving the Euro crisis has very sharp upward market outcomes, provides a sense of confidence and positive sentiment shifts, in what have been some pretty gloomy months leading into years for the major developed nations globally.

What’s our danger for our outlook in my view? Employment – not yet. Inflation – not presently, but with a devaluing dollar following this rate cut, fuel and imports may have an inflationary effect because dropping our cash rate puts downward pressure on our dollar – maybe this will be offset by the increased commodity sales, given our natural resources become cheaper to export with a soft dollar.

Was it consumer spending?

Sure it’s been sort of late, but recent retail sales data for October surprised on the upside. No doubt the mortgage belt has ‘been on the ropes’ for the past 12 months, but the November cut and this cut will see some much desired surplus cash being saved on the interest front, so I’m not convinced that the consumer spending story is still as problematic as it has been.

One thing that is a fact has been the deterioration within the global inter-bank lending area – the same issue that was a critical factor that led to the GF. Maybe our RBA have been talking to other central bankers around the world as a move like this goes a long way to short circuit a repeat, as long as Europe does some heavy lifting in the next month or two and reforms their own backyard.

All in all I note on balance I’m surprised by their move, but I’m not the RBA and they have wiser heads and far better data to make these decisions. They are obviously looking into the near term future and they see dark clouds forming. This rate cut is hopefully expected to generate the winds/activity to dispel those clouds looming.

One thing is for sure it’s great news and Merry Christmas from the RBA to all us borrowers, as long as the Banks and other lending institutions do their bit and pass on the full quarter of one percent cut into our mortgages. Let’s wait and see and that front.

 

(Those people reading this should be reminded this is an opinion comment by Ben Kingsley, and should not be used when making decision 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.)