Consider this: if the Reserve Bank board had been meeting yesterday, how much of a rate cut do you reckon we would have received at 2.30 pm?
Not the 0.25% handed out after the September 2 meeting; it would have certainly been either 0.50%, or 0.25% and a very big hint that the central bank stood ready to cut again if financial market conditions worsened.
With the Australian dollar under pressure and falling through 79 USc yesterday to a low here of around 78.65 USc, the central bank might have also wondered if a rate cut would have been worth it.
But it would have proceeded because it wants rates lower. That much is clear from yesterday’s release of the September 2 board meeting minutes. But so much else has been changed by the events on Wall Street in recent days.
Oil fell through $US92 a barrel in Asia to under $US90 as investors continued to sell commodities and shift to cash or US Government bonds. It rose to finish in Asia just over $US91 a barrel. It was down 9% or more in a day.
While the 9% fall yesterday in the oil price is good news for inflation, the rapid worsening of conditions in credit markets since late last week has produced some dramatic changes around the world.
In fact it would be fair to say that the dramatic events since late last week have changed the outlook for not only the US economy, but Europe, Australia and other major economies.
Even China is now looking to boost its still strong economy by cutting rates (see accompanying story). That rate cut did more to undermine the Australian dollar since Monday night than any selling by US investors worried about high yield currencies.
The real selling of the Aussie started Monday night after the Chinese rate cut was announced.
So an RBA meeting yesterday would have seen a very different outcome.
As it was the central bank’s September 2 cut was something of an anti-climax: it had been well signalled and at one stage a cut of 0.50% was forecast by some economists as the domestic economy slowed under the weight of interest rate rises and that huge surge in oil and petrol costs.
But when the cut came, there were few leads in the accompanying statement, except to confirm the easing bias.
Reserve Bank Governor, Glenn Stevens left us none the wiser about the timing of another cut after his appearance before the House of Representatives Economic Committee.
The bias to further easing was apparent from his comments in both the statement and before the Committee, and the same guarded signals are in yesterday’s minutes of that September 2 meeting.
But it’s now all redundant and out of date because of what has happened since last Friday in the US.
While the domestic economy remains a bit better than thought (with housing down, but not out and probably doing a bit better than the gloomsters think), the big shift has been internationally from the Lehman Brothers failure and other events on Wall Street.
The US Federal Reserve would not have been looking to move rates at the overnight meeting before last Friday, but when the fate of Lehman became final and the situations of Merrill Lynch, Washington Mutual and AIG also worsened, a big change was needed.
So a return to rate cutting won’t be an enormous shock as there’s actually ample reason to base one on the worsening state of the US economy (slowing consumer demand, rising stocks and inflation starting to ease, plus more job losses to come).
The US economy is far weaker than ours and will only grow this quarter because of strong exports and falling imports (a by-product of the slump) and a sharp rise in business stocks. All other domestic economic activities are mixed to depressed (housing).
Any move to cut US rates should help our dollar which fell well under 80 USc yesterday in a nasty sell-off caused mainly by China’s Monday night rate cut.
That rate cut and the apparent rationale: to boost demand among small business (the reserve asset ratio for small banks and lenders was dropped 1% as well to encourage more lending) was taken as a sign China’s slowdown might be a bit deeper than we thought.
So with all that in mind the RBA probably would have cut, perhaps by 0.50% or left enough hints that another cut was very likely if the first was 0.25%.
Instead we now face a situation in the financial markets not unlike what we faced a year ago when the credit crunch started.
But conditions are actually very different: interest rates are tending to be a bit easier in the markets; the liquidity injections in Australia, the UK and Europe are smaller than they were for most of the last five months of 2007 and first couple of months this year.
Only in the US has the liquidity injections been bigger than a year ago. Another $US50 billion was injected by the Fed overnight.
Asia and other emerging markets are slowing, and Europe, the US, Japan, New Zealand, Spain, Germany, France, Denmark and Australia have all experienced slowing economies.
The difference is we are nowhere near the contractions or faint upticks of growth being experienced elsewhere.
Normally the RBA’s latest minutes would give us a clue as to what comes next, but events of the past five days have dated them.
The losses and victims are larger than a year ago when it was Northern Rock in the UK that was rescued (a year ago almost to the day) and a couple of banks in Germany, a few hedge funds and lenders, plus lots of lenders in the US.
The stakes however, are now much higher as we edge towards the end game of the credit crunch. AIG and perhaps one or two other groups are still in the sights of nervy investors and other more aggressive investors.
The real focus of the central bank isn’t on the economy: it will return to that later in the month. Attenti
