Rates on hold
- Thread starter BoatBoy
- Start date
As expected.................prolly waiting for the May mini-budget to be handed down before deciding next course of action?
You make it sound like they have some sort of plan and actually know what they are doing.
It is always somewhat effective.
Even if banks margin are increasing this is not bad for the economy as increasing revenue would cover the losses from the GFC and banks would need less capital rising (even if they still did rise their capital in the last few months). Every time banks rise their capital that is resources going away from other productive businesses).
Same thing with the budget deficit: resources to pay for more bonds caused from deficit will take money out of businesses increasing their funding costs and increasing overall medium-long term interest rates
I’m going to expose a weakness in my understanding of the system. Here goes…
I understand pretty well the reasons FOR dropping the official cash rate (rising unemployment, economic stimulus needed, inflation risk abating), but I don’t really understand the reasons AGAINST dropping the rate. We now know that the latter trumped the former at today’s RBA meeting and I’m interested in WHY?
Here’s a few thoughts that I had:
Rising commodity prices – inflation risk still not dead??
Media (and government) oversimplify and overstate the severity of the “crisis”??
Stability – less change on the way down means less change on the way back up??
At the risk of this becoming another RBA bashing session, can anyone assist me with this?
I understand pretty well the reasons FOR dropping the official cash rate (rising unemployment, economic stimulus needed, inflation risk abating), but I don’t really understand the reasons AGAINST dropping the rate. We now know that the latter trumped the former at today’s RBA meeting and I’m interested in WHY?
Here’s a few thoughts that I had:
Rising commodity prices – inflation risk still not dead??
Media (and government) oversimplify and overstate the severity of the “crisis”??
Stability – less change on the way down means less change on the way back up??
At the risk of this becoming another RBA bashing session, can anyone assist me with this?
Here's my take:
1. They're keeping their powder dry. In the absence of any compelling need to drop rates, why should they? They'll keep them steady and lower them to offset the negative emotional impact of reported unemployment rates hiking. Don't shoot until you have a target.
2. Risk of over-stimulation and diminishing returns. You've alluded to this in part, but that's the only other flipside to the equation. They feel rates are at about the right stimulatory setting now given all the economic headwinds, but to lower them further would have a diminished effect and risk over-stimulating the economy. With the "green shoots" out there like China and US House Prices and Consumer spending, they want to wait and see what happens in Australia before they move again.
They've got it about right for now, firmly in the stimulatory range. The risks to the upside and downside are pretty evenly balanced. In my humble opinion, I think there will be one or two more eases to offset unemployment before the easing cycle bottoms. They'll probably then sit tight for about 6 months then kick off the tightening cycle once the market shows positive signs of growth and inflation rears its ugly head again.
Cheers,
Michael
- The RBA has the job similar to steering an oil tanker - it takes a loooong time for any effects to become visible.
They reduced the cash rate from 7%+ to 3% in less than 6 months. And are now waiting a while to see what the effects are. KRudd & Co have also helicoptered some cash to the masses which is has filtered through slowly.
Even after the public has taken action (ie spent or saved or invested their extra $$$), the stats (eg retail sales, employment, consumer confidence, house prices, car sales, business lending, building approvals etc) will take at least 1-4 months to appear. The rising stock market & bond yields imply that there is light at the end of the tunnel. - The RBA wants to keep some in reserve - unemployment will rise, business conditions will fall further. Unknown unknowns may appear. They want to keep some powder dry.
- Dropping the cash rate below ~2% has v. little effect - banks are unable follow cuts below there.
- The big 4 banks have just about said that they won't be following the RBA if there are more cuts in the cash rate.
once again, the RBA prove to be a reactionary force rather than a predictory force.
a 0.25% cut could have cemented a floor for banks' profitability. everyone know's that's a good thing, regardless of what we actually see of it.
but no, let's just "wait and see".
sorry Glenn. time to retire mate.
a 0.25% cut could have cemented a floor for banks' profitability. everyone know's that's a good thing, regardless of what we actually see of it.
but no, let's just "wait and see".
sorry Glenn. time to retire mate.
don't quite agree,
the bottom line is that wealth doesn't fall from the sky and if money goes to banks will have to come from somewhere else. Stability of the system is the priority and I think Glenn Stevens is doing OK or at least better then other in charge of government. Employment number and retail sales proved Glenn Stevenss was right in holding rate (and I was wrong predicting a small cut
)"wealth" is ones and zeros now, not something that can be measured in real terms anymore. i predicted a small cut too, in reaction to the impending badnewsbudget.
waiting for a target to shoot at is fine (and a great analogy), but if the only target they're aiming for is inflation again when there are a ton of little targets out there that could be hit with one buckshot pellet, well, you get the drift.
waiting for a target to shoot at is fine (and a great analogy), but if the only target they're aiming for is inflation again when there are a ton of little targets out there that could be hit with one buckshot pellet, well, you get the drift.
That is a good point. If you look for the last 50 years you are right and wealth is one and zeros. But is this GFC going to be deep enough to change that? I think it is probable that we get to a piont that the one and zero of today would give you not much clue how much they'll be worth in a yer or more. but of one thing you can be sure of and that is that wealth would be a closed relation between the total assets present in australia divided by the amount of money in the system. These money circulation speed changes don't have long term effect.
