Don't just stand there - panic! But it's a controlled panic from the Reserve Bank, justified by the dramatically increased risk of a credit-crunch recession. If it cut by 50 basis points today, it probably would have gone again next month by the same amount. It might as well have acted swiftly and decisively, as it has done.
The battle to keep Australia from recession has begun with the Reserve Bank's shock 100 basis point cut to official interest rates. Reserve Bank Governor Glenn Stevens has just described this as an “unusually large movement” in the central bank's cash rate. It's designed to make sure that the banks get to pocket something to offset the increase in their cost of funds. But it's also big enough to give the banks room to pass on something to mortgage and business borrowers.The global credit crunch and the wave of northern hemisphere banking failures and bailouts is throwing the US, Europe and Japan into recession.
The September crisis in global credit and equity markets has changed everything, producing what Stevens calls “a material change to the balance of risks”. There is a serious risk that the developed world recession will engulf Australia, even if our banks have so far weathered the storm. In central bank-speak, there is a risk that "demand and output could be significantly weaker than earlier expected”.
The Reserve Bank knows that inflation is still likely to rise to close to 5 per cent in figures for the second half of 2008. But the dramatic economic slowdown, including the collapse in crude oil prices, means that the inflation concerns have gone out the window.
Stevens suggests that today's 100 basis point cut does not establish a pattern for future decisions. That appears to have satisfied the currency markets, which did not sell down the $A in the immediate wake of the cut. The lower $A will provide an export cushion for the economic downturn. But there is still a big risk that we are about to enter the a recession.
