The RBA Cuts Rates - Discouting Uncertainty
Monday, 01 December 2008 12:40
The Reserve Bank of Australia (RBA) is preparing for a widely anticipated rate cut. Currently the benchmark rate from the Australian central bank is 5.25%, which is just above current CPI of 5%. RBA cuts rates

Most traders and investors are preparing for a 3/4 point rate cut to 4.5%, which is where the 10-year Australian government note yield is. This puts the Australians in an interesting situation with the benchmark rate lower than inflation and equal to the 10-year note yield.

What this means is hard to say as we have almost no historical precedent but it is unlikely to be good. The RBA usually targets an inflation rate of 2-3% and lowering interest rates typically increases inflation as capital becomes cheaper. 

Considering the current contraction in the world-wide capital markets the rate cut may be necessary to spur some growth in the world's only country/continent but more inflation will devalue the AUD even more than it already has been. 

This is all further compounded by the fact that the RBA and the Australian treasury does not manage monetary policy and government debt like the Americans. The Federal Reserve is free to print money and has been for some time but the Australians are much more constrained. This means that in the short term things may quickly move outside their control.

Click here to learn more about the real interest rate.

I am forecasting that this dip into a negative real interest rate (the benchmark rate - inflation = the real interest rate) will be very disruptive to the AUD/USD and that means more downside past the current consolidation.   

Learning Markets Video Click here to see the video the Reserve Bank of Australia's potential cut and what that means for the AUD. 

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3.25 Copyright (C) 2007 Alain Georgette / Copyright (C) 2006 Frantisek Hliva. All rights reserved."
 

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