The reality that we live in a truly global
economy has been brought home by the actions of the Reserve Bank of Australia
(RBA) in lowering interest rates last night (GMT). In so doing, the governor,
Glenn Stevens, has effectively contradicted some of his own very recent
guidance to the effect that stability in rates was to be the order of the day
for his central bank.
The rapid and accelerating fall in
commodity prices, in particular Iron Ore, so important to the Aussie economy,
the oil price collapse, a fall in the employment rate, lower growth in China (such
an important trading partner for Australia), falling inflation, but above all the trend in
international interest rates and other easing measures (i.e. Quantitative
Easing by many), which raises the possibility that triple rated Australia could
become another Switzerland in terms of capital seeking a home, militated
for the rate reduction.
But it still took the market and most
commentators by surprise. The result was, of course, a dramatic fall in the
value of the Aussie dollar (see above). This places it at its lowest level in
six years against the US dollar.
“The
latest fad” to be used to prevent a property bubble
One of the reasons this rate cut is
so dramatic is the pressure that exists on the property markets in Australia. House
prices have mushroomed and there has been, for some time, a fear of a property bubble
Down Under. So-called macro-prudential policies, which would place restrictions
on mortgage lending but which were described by Mr. Stevens at a governmental economic
committee last August, as “…the latest fad, internationally”, are now presented
by him as the means of preventing such an outcome.
The central bank monetary policy
statement language has also changed. It now opens the door to further core
interest rates cuts in the near future.
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