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RBA
Raises Official Cash Rate
At its meeting today,
the Board decided to raise the cash rate by 25 basis points to 3.25 per
cent, effective 7 October 2009.
Statement by Glenn
Stevens, Governor Monetary Policy RBA
Tuesday, 6 October
2009
The global economy is
resuming growth. With economic policy settings likely to remain
expansionary for some time, the recovery will likely continue during 2010
and forecasts are being revised higher. The expansion is generally
expected to be modest in the major countries, due to the continuing legacy
of the financial crisis. Prospects for Australia's Asian trading
partners appear to be noticeably better. Growth in China has
been very strong, which is having a significant impact on other economies
in the region and on commodity markets. For Australia's trading partner
group, growth in 2010 is likely to be close to trend.
Sentiment in
global financial markets has continued to improve. Nonetheless, the state
of balance sheets in some major countries remains a potential constraint
on their expansion.
Economic conditions in
Australia have been stronger
than expected and measures of confidence have recovered. Some spending has
probably been brought forward by the various policy initiatives. As those
effects diminish, these areas of demand may soften somewhat. Some types of
capital spending are likely to be held back for a while by financing
constraints, but it now appears that private investment will not be as
weak as earlier expected. Medium-term prospects for investment appear,
moreover, to be strengthening. Higher dwelling activity and public
infrastructure spending is also starting to provide more support to
spending. Overall, growth through 2010 looks likely to be close to
trend.
Unemployment has not risen
as far as had been expected. The weaker demand for labour over the past
year or so nonetheless has seen a moderation in labour costs. Helped by
this and the earlier fall in energy and commodity prices, inflation has
been declining, though measures of underlying inflation remained higher
than the target on the latest reading. Underlying inflation should
continue to moderate in the near term, but now will probably not fall as
far as earlier thought.
Housing credit growth has
been solid and dwelling prices have risen appreciably over the past six
months. Business borrowing has been declining, as companies have sought to
reduce leverage in an environment of tighter lending standards. But large
firms have had good access to equity capital and access to debt markets
appears to be improving, helped by the better-than-expected economic
conditions and increased willingness on the part of investors to accept
risk. Share markets have recovered significant
ground.
Interest rates facing
prospective borrowers on fixed-rate loans have already risen to some
extent, as markets have anticipated a higher level of the cash rate. For
many business borrowers, increases in risk margins will still be occurring
for some time yet. In addition, the exchange rate has appreciated
considerably over the past year, which will dampen pressure on prices and
constrain growth in the tradeables sector. These factors have been
carefully considered by the Board.
In late 2008 and early
2009, the cash rate was lowered quickly, to a very low level, in
expectation of very weak economic conditions and a recognition that
considerable downside risks existed. That basis for such a low interest
rate setting has now passed, however. With growth likely to be close to
trend over the year ahead, inflation close to target and the risk of
serious economic contraction in Australia now having passed,
the Board's view is that it is now prudent to begin gradually lessening
the stimulus provided by monetary policy. This will work to increase the
sustainability of growth in economic activity and keep inflation
consistent with the target over the years
ahead.
Why Today Could Kick Start the
Depression
Tuesday, 6
October 2009 - Melbourne
Australia
By Kris Sayce (Source: Money
Morning)
It's a big day today on the
interest rate front. Our marionette-like Reserve Bank of Australia (RBA)
governor and his chums will settle down in their Martin Place
office today to discuss interest rates.
They'll look at all sorts
of tables and charts and statistics. They'll be served either tea or
coffee. And doubtless there'll be a nice selection of biscuits available
as well - rich tea, digestives, custard crèmes... and maybe even a few Tim
Tams if they're good.
And then, if the market is
right, they'll light the touch-paper on the Australian public by putting
up interest rates.
What good people these people at the RBA and in
government are.
For the last year they've
- metaphorically - told the public to douse themselves in petrol with
cheap credit, and now they're asking them to hold a lighted
match.
Whoosh! Thanks for
coming.
Of course we don't know
for certain the RBA will raise rates today. But we do know the equity
market is getting a bit jittery about the prospect.
But whether it's today or
on Melbourne Cup day, the slowcoach mainstream economists have finally
come round to the idea that interest rates must
rise.
That's right, it was until
recently that many of our economic banking fiends were convinced the RBA
Cash Rate would "begin with a
2" and that rates had no chance of rising until mid
2010.
We were even told "inflation is dead." Of course, it
isn't, it's just been playing dead - the little
rascal.
Now don't get us wrong,
we're not saying we believe interest rates should stay low. The point is
the RBA should never have taken them this low to begin
with.
In fact, if we're being
completely honest, the RBA shouldn't be there at all. All old 'wooden
head' and his chums do is manipulate the currency and exchange rate for
the benefit of themselves, their banking mates and the
government.
Whereas, as always, it's
the consumer - the individual - that's left in the lurch, left to pick up
the bill.
The sad fact is that the
RBA has manipulated interest rates downwards in order to sucker in more
borrowers into what was already an over-extended credit environment. It
needed to sucker them in to help prevent the banks from
collapsing.
The whole market became so
leveraged and so over-extended that in many countries the whole thing just
broke.
But that hasn't stopped the usual suspects - the bank
economists - from applauding every decision from the RBA. And not only
that but urging it to do more. "Forget about inflation" they all
yelled, "it's deflation you need to
worry about."
And like a sad and sorry
blockhead, the RBA agreed.
It told the nation that
"de-leveraging" would be painful and should not be allowed to happen. Only
it turns out that "de-leveraging" is like the boogey-man. It sounds scary,
but it isn't real.
The nation was urged to do
its bit by spending what it had, what it didn't have, and what it was
given.
That's the only way.
After all, there's no
point in saving money, when the real rate of interest is so low. And
there's no harm in borrowing money when the interest rate is so low - look
at how cheap it is!
And of course, to reward
you for spending, the nation was given someone else's money to spend
too.
Naturally enough, all this spending "worked."
The economy has "improved"
much more than anyone suspected. Company profits have "improved" and are
rising again. The taxpayer situation is not as bad because they haven't
been indebted by its government as much as feared.
And asset prices have
started to take off again.
But now the banking
fiends, the mainstream media and other saps have turned on a sixpence. The
stimulus has "worked" too well. And now it must be stopped... kind of. But
not completely.
"But isn't this what you wanted to
happen?" the dumbfounded public reply.
What a sad and irrelevant
life these superannuated public servants lead. The RBA believes its own
b... propaganda. It believes it can fine-tune and minutely micro-manage a
$1 trillion economy.
It incredibly believes it can raise rates, then
cut them, then raise them, then cut...
It believes it has the
skill and agility of a slalom skier. That it can dodge one way and then
the next without hitting any of the flags, and earn a gold medal - or in
the RBAs case, a polymer one.
We all know manipulating
an economy to such an extent is not possible. It isn't possible to know
precisely how 21 million people are going to behave or react to a move in
interest rates.
But what we do know is
that thanks to the RBA, the Australian public is being played for fools.
And on top of that, the Australian public is being set up for a fall
too.
Every economic signal
which the pollies, the mainstream economists and the commentators are
pointing to is directly related to the artificially low interest rates and
the government's splurge-spending.
The same fools have
somehow made themselves believe that Australia
has a magical economy that has been able to side-step the worst that's
happened overseas.
The real truth is it's
been kept afloat by the same tactics that pumped up the fake economy
before.
The recovery and the economic miracle isn't real. It's a
mirage.
Rather than the excess
debt being purged from the economy through business failures and
bankruptcies, the excess debt has been supported by, erm, more debt. Not
only that, but more debt provided at an even cheaper rate than
before.
Unfortunately, the real
consequences of the so-called 'credit crunch' have not even half played
out. It has merely been postponed to a later date. And next time, just as
the mainstream didn't see the last one coming, they won't see the next one
coming either.
But that hasn't stopped
the mainstream commentators we've listened to, blandly talking about a
0.25% interest rate rise being manageable for
borrowers.
What about the next 0.25%?
Or the 0.25% following that? The borrower has averaged down their funding
cost but averaged up their leverage.
Last night we tuned into
the abysmal "Your Money, Your Call" on Sky Business. Apparently
overleveraged borrowers in residential property investments will be able
to just pass the rise on to tenants as higher rent, or use the negative
equity to their benefit.
It's the typical mentality
of property investors, thinking they can get rich by running a negative
cash-flow on their properties. The bigger the loss the bigger the profit
is how it seems to be!
Anyway, the now inevitable
need for interest rates to rise could see the next step of the Depression
scenario play out. And not just here either. Overseas economies have
played the same dangerous game and will suffer the same
consequences.
The ingredients for an
inflationary Depression have been sown. An economy in which the cost of
living increases as the quality of living decreases.
Prices have risen -
although it may not seem by much. The fact is they have risen, when what
the economy and consumers really needed was falling
prices.
Labour costs remain high,
and cannot easily be reduced due to regulations and
unions.
Industry has been
encouraged to spend on capital in order to receive tax breaks. Businesses
have been given a free kick due to the free money and easy credit given to
consumers - this has kept prices high.
And given the barriers to
entry for new businesses in any industry and the duopoly status of many
Australian industries, there is little competitive threat to business.
That means there is less incentive for businesses to cut
prices.
Besides, the continued
increase in credit 'creates' more money (inflation) and weakens the
Australian dollar. Both of which lead to rising
prices.
Of course, all this forces
interest rates even higher.
Remember that mild
inflation creates the illusion of increased wealth. The reality is
actually a decrease in real living standards.
Does this necessarily mean
hyper-inflation? You'd hope not. And it's not inevitable. Providing
governments and bureaucrats stop meddling and let the excesses that have
been built into the economy purge themselves out.
These excesses will
eventually be purged, it's just a matter of when.
Whether the RBA increases
interest rates today, next month or the month after, it doesn't matter.
Its previous actions have already started the ball rolling. The next
interest rate rise will just give it an extra nudge.
Cheers,
Kris.
Recession Proof Yourself with
Humour and Laughter
The results of a government study
For the past three years,
the government has worked hard and spent many tax dollars to find the
approval ratings for unemployment.
They have concluded that a 7%
unemployment level is acceptable to 93% of the working
population.
Now let's just hope that the unemployment rate doesn't
change.
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