All Hands On Deck, Except The One On The Panic Button
Sydney Morning Herald
Wednesday October 8, 2008
FORGET the popping of champagne corks in stockbrokers' offices. Ignore the cheer from the mortgage belt and listen carefully.
Yes, that is a siren wailing down at 65 Martin Place, home of the Reserve Bank of Australia. And over the din is the voice of Glenn Stevens, the governor, megaphone in hand, shouting: "Battle stations. All hands on deck."Yesterday's full 1 percentage point hack in the official cash rate smacks of a central banker with his spare hand firmly on the panic button.And with good reason. Europe is plunging into recession, its banking system is in crisis and the US, despite its desperate $US700 billion bail-out of Wall Street, has hardly skipped a beat as it hurtles towards Earth.On the surface, Australia's economy still appears robust. Unemployment is low and inflation is still sitting above the acceptable limit. But consumer and business confidence has taken a battering, retail sales are poor and metal prices - the backbone of our export earnings - are plummeting. That is the main reason our dollar has fallen more than 25 per cent in the past few weeks. It is also why the Reserve Bank has opted for bold action.Until Monday, a 0.5 percentage point cut was on the cards. Bear in mind, a deal had been done to let the banks to keep just under half that, so the real cut would have been just 0.3 of a point. After the carnage on financial markets across Europe and on Wall Street on Monday, there was talk that the Reserve might go to 0.75of a point. Instead, Stevens has fired the big guns in an effort to breathe some life into the domestic economy.Late yesterday, the big banks came out with announcements that they would pass on a cut of 0.8 of a percentage point. Odd is it not, how they all picked the same number. An ill-informed critic could be forgiven for thinking they somehow were acting in concert.Not to worry. The notoriously fickle crew trading the stockmarket loved it. After a 3.3 per cent early fall, the local bourse rebounded, ending the day 1.7 per cent stronger. There is every reason to believe this will not be the end of the rate cut cycle. Financial markets were betting on precisely that last night and it is pretty sure bet, despite the Reserve governor's posturing. Although Australian interest rates traditionally sit higher than those of the US, at the moment ours are way out of kilter with those in the rest of the world.Even after the massive cut, Australia's official cash rate sits at 6 per cent, still much higher than in most Western economies. The Bank of England is likely to cut its cash rate, now on 5 per cent, on Thursday night our time. And before the Wall Street bail-out, the US central bank slashed its interest rate to just 2 per cent.As we have since seen, the US rate cuts did not make a lick of difference to the credit crisis that is smothering the global financial system, and the US Federal Reserve now has little wriggle room. Central banks worldwide have been perplexed by their inability to solve this crisis. Tinkering with interest rates did not work. Huge cuts have not had much impact either.The reason is, it does not matter how low official interest rates go if no one is lending money. That is why it is called a credit crisis. There is not any credit, unless you are prepared to pay an exorbitant price.Do not be fooled that everyone is overjoyed by lower interest rates. They benefit only those with loans. A large number of retirees depend on interest payments to fund their lifestyles. And spare a thought for those who, after taking a battering on the sharemarket for most of this year, decided to head for the safety of cash. They face the absolute, although somewhat bleak, certainty that our big banks will pass on the full rate cut to their deposits.
© 2008 Sydney Morning Herald
