The Reserve Bank has slashed its key interest rate by 1% to 3.25%, the lowest since 1960.
The bank’s decision, announced yesterday afternoon, followed the board meeting and the Federal Government’s $42 billion spending package.
In terms of getting the message across it was effective and in his post-meeting announcement, RBA Governor Glenn Stevens said the board "took into account" the earlier package of measures from the Federal Government.
"In making its decision, the Board took into account the package of measures announced by the Government earlier today.
"The combination of expansionary monetary and fiscal policies now in place will help to cushion the Australian economy from the contractionary forces coming from abroad."
Note the word ‘cushion" not protect or save us, cushion, a support.
The Federal Government made clear that its package of measures was designed to ‘support’ 90,000 jobs over the next year and a bit, not save them, or result in the employment of 90,000 extra people.
In fact up to 300,000 people could lose their jobs over the next year and a bit as the unemployment rate goes from 4.5% to a forecast 7%.
In fact Australia isn’t doing all that badly, relative to the US, Japan, the US or even China where unemployment is rising rapidly.
As we reported yesterday, the Commonwealth Bank is doing well, so well that its first half earnings will be 20% better than the market thought at around 16% off the same period in the 2008 financial year. CBA shares jumped more than 10% yesterday to over $29 in one of its best days for months.
The financial markets are not frozen, over $4 billion was raised in the bond market on Monday, the ANZ is about to raise more and billions of dollars are rolling into companies large and small from share issues *$70 million to Newcrest Mining, $2.9 billion to Westfield and Qantas is in line with its hand out).
Our December data isn’t as terrible as that from the US, Japan, the UK, Europe or China and South Korea. Production isn’t plunging, unemployment isn’t surging.
Times will get tougher as the year goes on, but not as desperate as they are in the US. In fact for many in business and the commentary teams, its time to get a grip.
The policies from the Federal Government are all about support for what we have and to lessen the possibility that we will have to take larger job losses and large falls in demand over the next 18 months and more as the impact of the slump, especially that from recessed Japan, South Korea and Taiwan, and sluggish China, sweeps over us.
Think of that economic phrase, "aggregate demand": this is what the Government, Treasury and the RBA are aiming to do.
The RBA is cutting the cost of money, and handing billions of dollars to mortgage owners and businesses large and small (and taking it away from retirees and others on interest income), the Government and Treasury are trying to encourage individuals and business to spend not only the extra from the RBA, but also the money from Canberra.
And if we have the confidence, we should. of course there will be some money saved, conditions are tough in resources and other sectors, but even there, they are nowhere near as bad as in the car industry in Japan and the US, or in US and UK retailing or in the black hole of the US housing sector.
Demand was weak in the September quarter, running at negative levels outside the farm sector.
That may have been repeated in the December quarter, so now the authorities have to make sure demand in the non-farm economy is maintained and increased in coming months.
That means more retail spending, rising demand for housing and construction, more demand for building products of all types, which can be switched from mothballed mining projects into schools, roads, bridges, highways and the like.
The RBA’s rate cut follows the Federal Government’s revision of growth forecasts for the economy.
The Rudd Government expects Australia’s growth to slow to 1% this fiscal year to 0.75% next year – one of the few economies to continue to expand.
Now we have 4% of rate cuts, around 5% of annual Gross Domestic Product in extra government stimulus over the next 18 months or so.
The economy has been turbocharged to try and limit the impact of the credit crunch and the global slump, especially the intensifying Asian recession whose backwash has already started washing over us, released yesterday showing December international trade figures showing a 40% slump in the size of the trade surplus in December, and a 80% fall since September when the crisis worsened.
The cut to 3.25% maintains the expansionary policy the RBA board formally adopted at December’s board meeting.
With the headline CPI down to 3.7% and the RBA’s own measures at 4.3% and easing, there’s still more scope for rates to be cut if, as expected inflation again falls in coming quarters. The Bank said today that inflation "is likely to continue to decline."
With the resources and associated sectors contracting quickly, there’s now ample room in the economy for the Federal Government to lift spending in infrastructure and to maintain a pipeline of money into parts of the population that will spend and add to retail demand, while spending in business sectors to replace demand that has gone with the evaporation of the resources boom.
Here’s what the rest of the RBA Governor’s statement said:
"There was a significant deterioration in world economic conditions late in 2008.
"The effects on household and business confidence of the financial turmoil following Lehman’s collapse, and continuing strains on major financial instit
