Reserve Bank Leaves Cash Rate at 6.75%

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Canada cut interest rates. The Fed will probably do the same when it next meets. Australia’s Reserve bank, however, is standing firm. The cash rate will stay at 6.75% for now.

Reserve Bank governor Glenn Stevens released a statement with the decision, saying, “Recent information continues to indicate strength in demand and output in Australia, with the economy having relatively little surplus capacity.” But what about the credit crunch Mr. Stevens?

“Sentiment in global credit markets has deteriorated recently after an earlier improvement and prospects for growth in the major economies appear to be weakening. It is unclear to what extent that will affect Asia, where conditions at this point look quite strong. But overall, it now appears likely that global growth will be closer to trend in 2008, after several years of above trend growth.”

Maybe so. The faltering oil price and rising US Treasury prices are suggesting a recession in the US, maybe even a global recession. And here’s a thought…

Could oil finish the year below US$80? If the markets price in much slower global growth, yes. And along with the falling oil price you might even get-hold on to your old hats-a rally in the US dollar. This would be consistent with Bill’s bearish dollar prediction being quoted again in today’s Australian Financial Review. Any time the public begins to agree with you, it’s time to reexamine your position (this goes for trading as well as politics).

All that talk of lower global growth doesn’t mean local prices aren’t rising. Governor Stevens also said that “High prices for food, energy and natural resources, however, continue to pose a significant risk to inflation around the world.”

It’s the worst of both worlds. Rising prices and slower growth. Stagflation. So, no rate rise this month. But let’s wait and see how things play out in the credit markets.

Dan Denning
The Daily Reckoning Australia

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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2 Comments on "Reserve Bank Leaves Cash Rate at 6.75%"

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Market Socialist Dude
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Stagflation…wasn’t the neoliberal revolution supposed to have cured us of such ills?

Coffee Addict
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Actually most so called economic schools would come up with the similar conclusions. The Monetarists, for example, emphasise holding back the growth in money supply to the real rate of economic growth. Keynes promoted the kind fiscal stimulation we now see but only in the context of his own times. Even Dan and Bill have at times acknowledged the usefulness of such stimulation when ALL of the other economic parameters are there to support a long growth cycle. This is not currently the case. In any case politics and bull will defeat logic right up to the day of the… Read more »
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