The biggest cut in Australian interest rates since 1992 - a full point chop to 6 per cent - did indeed come as a shock on Tuesday, judging by the dazed reactions from commentators, investors and analysts Down Under. Internationally, however, the move was broadly welcomed as the first concrete sign that central banks may be planning a wave of co-ordinated cuts to bolster bank lending and shore up markets.
Stocks rallied across Asia after the Reserve Bank of Australia cut its benchmark cash rate by 100bp to 6 per cent and the focus shifted to how other central banks, from Japan to Europe, would answer the call from US officials for a “forceful and co-ordinated” global reaction to kickstart faltering bank lending, noted Reuters.
The rate cut also halted the yen’s recent surge, noted Bloomberg, after it shot up against the euro, sterling and the dollar on Monday amid the unwinding of JPY-AUD carry trades. It came also as central banks pumped more than $11bn into money markets on Tuesday - including the Bank of Japan which injected Y1,000bn ($9.8bn) into money markets as the Tokyo three-month interbank rate held at 0.87 percent, the highest this year. The RBA added A$1.8bn ($1.3bn) as well as slashing borrowing costs 1 percentage point, twice as much as economists estimated. Taiwan’s overnight lending rates surged the most since June 2007 and Singapore rates neared a nine-month high.
But while Australia might have been seen internationally as doing its bit for the “co-ordinated” global reaction, at home the response could only be called sour.
“That the Reserve Bank has decided to go for a full 1 per cent rate cut is a massive shock, and risks causing as much damage as benefit”, wrote commentator Alan Kohler on Business Spectator.
But so great is the emergency in global financial markets that Australia’s central bank is not worried about giving the impression of panicking, and is going for all of this year’s rate cuts at once.
And let’s face it – the RBA is panicking. is going for all of this year’s rate cuts at once, he added.
Kohler has a point. The RBA’s official statement did have an edgy tone to it:
The Board judged that a material change to the balance of risks surrounding the outlook had occurred, requiring a significantly less restrictive stance of monetary policy. The Board also took careful note of movements in funding costs in wholesale markets. Having weighed these considerations, the Board decided that, on this occasion, an unusually large movement in the cash rate was appropriate in order to bring about a significant reduction in costs to borrowers.
Financing is likely to remain “difficult” around the world for some time ahead, the RBA added. “This is also affecting Australia, albeit by less than in many other countries, given the relative strength of the local banking system….Economic activity in the major countries is also weakening, and evidence is accumulating of a significant moderation in growth in Australia’s trading partners in Asia.”
“It’s not as if this has never happened before, but it’s the sort of thing a central bank does when an economy is in recession already, not when it looks like there’s one looming”, adds Kohler, reminding us that the last time the RBA took such drastic action was in May 1992, at the end of a succession of nine 1 per cent rate cuts (that’s right, nine) and one 0.5 per cent cut. The official cash target was reduced from 17.5 per cent to 4.75 per cent between January 1990 and July 1993.
Some commentators - including Business Spectator - warned earlier this year that the RBA’s focus on inflation and its two rate increases in February and March - even amid a major credit reduction - risked hastening recession.
Well, the central bank has now given back both those rate hikes as well as earlier ones last year and in 2006. Yet, monetary policy didn’t work to slow the debt-fuelled boom when rates were rising between 2001 and 2007, and it won’t help much to counter the deleveraging bust now, notes Kohler. “If credit ain’t available, it doesn’t matter what it costs.”
And how often in history, he asks, has a central bank cut official rates with the most recent unemployment rate below the rate of inflation? (In Australia they’re officially 4.1 per cent and 4.3 per cent, rising to 5 per cent, respectively).
“Never, I’d suggest”.
But these are unusual times.
