RBA Rate Cut Does Little to Unlock Credit Market

“Rally to me,” said Glenn Stevens. And investors did.

The RBA rate cut WAS a full percentage point as we speculated yesterday. And it certainly did make a splash. Economists loved it. The critics praised it. And investors “huzzahed” the ASX 200 up nearly two percent on a day when the rest of the globe quaked in fear.

What has changed? The bank has shifted from being worried about inflation to being worried about recession. A credit crunch? Slowing global demand? Falling commodity prices? All those DO seem to add up to much slower growth.

“The recent deterioration in prospects for global growth,” the RBA released in a statement, “together with much more difficult market conditions even for creditworthy borrowers, now present the risk that demand and output could be significantly weaker than earlier expected. Should that occur, inflation would most likely fall faster than earlier forecast.”

But is the biggest RBA rate cut in 16 years more symbolic than anything? What will change in the real economy and the credit markets because of what the RBA has done? The big four banks did pass on a rate cut of 80 basis points to consumers. That’s a win for the battlers.

Will the RBA rate cut unlock the interbank lending market, though? The RBA board said it took careful note of movements in funding costs in wholesale markets,” and that, “an unusually large movement in the cash rate was appropriate in order to bring about a significant reduction in costs to borrowers.” So credit is now cheaper. But is anyone selling? Banks might begin lending if they were sure it was safe to lend. But is it?

To the extent that Aussie banks fund domestic lending by borrowing from foreign banks, the lower rates don’t help either. The cut DOES help reduce the cost of all that debt Aussie consumer are carrying (160% of disposable income according to Dr. Steve Keen). But it doesn’t make the debt go away.

We made an error earlier this week when we said Australia had moved to guarantee bank deposits. That move has been made in the U.S. and Europe, but not yet in Australia. And according to Wayne Swan on Lateline last night, there’s probably no need to do so, since Australian banks are well regulated and well capitalised. Hmmmm.

Dan Denning
Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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4 Comments on "RBA Rate Cut Does Little to Unlock Credit Market"

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This rate cut was obviously for the banks, Swan pretty much gave them the green light to keep most of it – not that they would care what he said. By passing most of the cut onto the price of consumer credit, should we assume the banks are starting to get worried? After all, they make most of their money through lending rather than people’s savings. But I don’t see the population flocking to the banks in droves to take out million dollar loans to buy inflated property. And already the cut is doing its dirty work, the AUD is… Read more »

This rate cut was really dumb. Now the Australian dollar is fiendishly losing value. Australian companies with imported inputs have come to a standstill and consumers are withdrawing money from the banks (correctly) anticipating hyperinflation.

Three Wise Men? – 2008 and 1927 2008 “Federal Reserve Chairman Ben S. Bernanke push for the broadest coordinated interest-rate cut in history started with a weekend of telephone conversations with Jean-Claude Trichet [President of the European Central Bank, previously France’s chief central banker] and Mervyn King [Governor of the Bank of England]. “Calling from his Washington office on Oct. 4 and Oct. 5, Bernanke broached the idea with Trichet, the European Central Bank president, and King, the Bank of England governor. The talks culminated Oct. 7 in a conference call where they privately hammered out details of the unprecedented… Read more »
Post-Crisis Rally, Retracement and Major Rally The discount rate cut from 4% to 3.5%, in response to an international financial crisis, was effective on August 5, 1927 at the Federal Reserve Banks of Boston and New York. The Dow Jones closed lower on the day just as it did on October 8, 2008 after the interest rate cuts in response to the latest international financial crisis. It was not until seven days later, on August 12, 1927 that the Dow put in a financial-crisis bottom (177.13) that would eventually lead to the mania rally of the 1920s boom. From August… Read more »
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