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Dramatic rate cut may signal more financial heartache

The Reserve Bank of Australia’s (RBA) latest dramatic official interest rate cut has signalled to many that the Australian economy is in worse shape than first thought.

The cut of 0.75 of a percentage point follows a full percentage point cut last month.

The action has many people worried, although Treasurer Wayne Swan is citing international factors, rather than a deep concern about the domestic economy, for the move.

Mortgage holders may be breathing a sigh of relief after the dramatic interest rate cut, but the Opposition’s finance spokesman Joe Hockey says they should not be celebrating just yet.

He fears the RBA’s move signals tough times ahead.

“I think the RBA is clearly saying that it is very concerned about the state of the Australian economy and we can no longer rely on high commodity prices and large export volumes to weather the storm which has erupted overseas,” he said.

It is a view echoed by Chris Richardson from Access Economics.

“I think it is a sign that the Reserve Bank is very deliberately taking out insurance and being seen to take out insurance,” he said.

“This is now twice in a row the bank has deliberately exceeded expectation about how much it’s going to cut.

“Of course there are reasons to be worried and in the last handful of weeks the main reason is the extent to which China is getting caught up in this.”

China slowing

In a statement outlining its decision, Reserve Bank Governor Glenn Stevens points to significant weakness in the major industrial economies and more signs of slowing in China.

Mr Richardson says even with China’s economy weakening, Australia is better positioned than most.

“My best guess is Australia will avoid a recession. Partly that’s luck, in the sense that the biggest problem for Australia is a lack of confidence,” he said.

“We’re very worried by what’s happening, but consumers can pull back before businesses can.

“Shoppers are already on strike. You can see that in a number of big retailers.

“But it takes longer for businesses to pull back on their spending.

“So we’ve got consumer weakness now, in 2009 and perhaps into 2010 we’ll have weakness in business spending and that difference in timing might help us avoid a technical recession.”

But for now, attention is turning to the big banks and whether they will pass on the rate cut in full.

Joe Hockey says this time round, the banks have absolutely no excuse.

“Because the banks are well capitalised, they are receiving the very generous benefit of the Rudd Government unlimited guarantee and really there is no justification for the Treasurer Mr Swan to take the soft route and allow the banks to deliver anything less than the full cut,” he said.

ABC Online
By Staff and Writers
5th October 2008

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