It’s often said that a week is a long time: in the financial markets at the moment, it got to the stage where a night was a very long time as banks fell or were rescued in Europe and the US and bailout schemes were trotted out across the globe.
The turmoil prompted the Reserve Bank to slash its cash rate by 1% on October 7.
It explained that yesterday in the minutes of that meeting, but a speech just over 90 minutes later from Reserve Bank Governor, Glenn Stevens, suggests that the bank now believes that conditions have eased.
"The situation is very serious, he told the Sydney business lunch at the start of the speech.
"It is up to policy-makers and private market participants to put the system back together, without the excesses that built up over the past years, so that it can serve its proper function: facilitating trade and genuine investment flows, in the process supporting economic growth."
But then he went to break out in a small burst of optimism:
"But the world is, it seems to me, getting on to a better path. As a result, the likelihood of a global catastrophe has in fact declined over the past couple of weeks."
The ‘serious’ nature of the situation produced the biggest rate cut in 16 and a half years and it sent a signal to us all that things in the economy were worse than we expected. After an initial pass through by the banks, the full 1% (and a tiny bit more by at least the ANZ) is now on its way to borrowers.
And while borrowers in business and housing will get the benefit of the 1.25% cut in rates in September, others in the community will get a rate cut in effect from the December 8 stimulatory package.
First home buyers for both new and used homes will pick up some benefit in higher payments from the government, leaving the unemployed and single wage earners renting (or couples renting) without any Christmas goodies.
But that seems to be the price of trying to stave off what the central bank and its board saw from the problems in the global markets and economy in the wake of the Lehman Brothers weekend just over a month ago.
The RBA was fearful of the possible damage to the Australian economy from the turmoil in world financial markets in the wake of the failure of Lehman Brothers and a spate of other banking problems.
It saw a possible rationing of credit by Australian banks in coming months and all of this helped convince the Reserve Bank board to cut rates by that larger than expected 1% at its last meeting on October 7.
The RBA warned in the minutes of "downside risks to the domestic economy" from the worsening global conditions, singling out a possible worsening in employment and business investment in the months ahead.
"Statistics suggested that the slowing was most pronounced in NSW compared with elsewhere in Australia, though the employment data by state were quite volatile.
Job advertisements had been falling over the past six months, with newspaper job advertisements sharply lower. This suggested further slowing in employment was in prospect."
"Business investment had increased by 10 per cent over the year to the June quarter, but the outlook was now more uncertain. Despite the positive intentions reported in the capital expenditure survey, private-sector business surveys suggested that investment plans were being scaled back."
The minutes were released yesterday morning as the stockmarket enjoyed its second solid day of trading and the Australian dollar was around 70 USc.
The release came as the National Australia Bank reported a lower profit for the 2008 full year, as forecast, but warned that the next year would feel like a recession, but would actually see growth at around 1%, according to its retiring CEO, John Stewart.
Major retailer, Woolworths released solid first quarter sales figures showing stronger same store growth across its vital food and liquor business of 6% and top line growth of 8.3% for the division and 9.6% for the group as a whole (including New Zealand).
And the country’s biggest furniture, consumer entertainment and IT retailer, Harvey Norman, reported a worsening in its sales in the week to Sunday. Last week it reported a drop in same store sales of 4.7% for the four weeks to October 12.
Yesterday it said that in the four weeks to October 19, same store (or like-for-like as Harvey Norman describes it) sales had slumped 5.8%. Harvey Norman has undertaken to update these figures for the next three weeks.
As the global credit crunch morphed into a global credit freeze in the wake of the collapse of Lehman Brothers and the other bank bailouts and mergers, the RBA initially looked at a half a per cent cut in the cash rate, but left itself the room to cut by more, as the minutes revealed
"The paper prepared for the Board recommended a large reduction in the cash rate, of at least 50 basis points, with the amount to be subject to review in light of any events occurring between the preparation of the paper and the time of the meeting. In the event, the recommendation put to the Board at the meeting was for a reduction of 100 basis points, to 6.0 per cent."
The bank was worried however that such a large rise might spark further pressure on the already weak dollar, but went ahead anyway
"The Board considered the possibility that a larger-than-expected easing of 100 basis points could have a negative effect on market sentiment. The exchange rate in particular had fallen sharply over the preceding 24 hours.
“Members concluded that, despite the possibility of a short-term adverse reaction, stronger action would help sentiment over time."
The minutes confirm that the RBA also cut rates to get the largest possibl
