Well the RBA didnt hold back. Third meeting in a row they've cut the Cash Rate in response to concerns of slowing growth and abating inflation risks. the question really is how much will get passed on this time??
We've now seen 2% cut from the cash rate in 2 months and the RBA has shown themselves to be quite agressive, moving more than the market expected the last 2 meetings. Combined with the $10 billion fiscal stimulus announced last month, this should help keep domestic demand pumping along in Australia.
Anyone have any thoughts on this latest RBA move?
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2 comments:
Personally, using interest rates to stimulate production seems to be ineffective while there are physical supply constraints (did you notice oil hit $70 a barrel today?).
While it can stimulate demand in the very short term, I see that this rate cut will exacerbate the inflation I foresee in the coming years (even if there is a short term break in inflation - with some analysts pointing to deflation - commodities will bounce back and we will be back where we were about twelve months ago).
The RBA has been executing text book monetary policy - especially by outdoing market expectations. Often in economics you find that is expectations are fulfilled, you see no changes, it is only when there is a surprise that changes happen. But the real point here is that even all this textbook monetary policy is doing very little, if anything, to change economic conditions. Clearly the theories that central bank are prescribing to contain fallacies.
But remeber there is a 6-9 month lag before monetray policy filters into the real economy and stimulates investment. That lag may be exaggerated due to the credit market problems ie banks not passing cuts through to small business, consumers. Remember its not just the price of money, the availability of credit is integral to stimulating demand.
The key is the transmission of lower rates to increased credit availability which doesnt seem to be happening at the moment!
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