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7th February 2012 - Will the Reserve Bank Reduce Interest Rates today?
By Steve McClure:
Many are predicting a rate cut, but my opinion is - No! Reasons for the RBA to delay a cut:
1. Strong growth in some sectors of our market, where real estate and other prices are still too high. Job advertisements are up. The mining boom, which has had a recent resurgence, will see funds flow through to other areas of the economy.
2. The U.S. economy is slowly strengthening, with over 250,000 jobs created there last month. Germany is performing well albeit with large debt. China's demand is still insatiable. These factors will strengthen the U.S. dollar and lessen the case for a rate reduction.
3. All major banks have refused to ensure that the full reduction will be passed on anyway. If the banks hold on to any part of a reduction, it raises the question - Is it the RBA's role to reduce rates in order to increase the bank's profits? Clearly it's not. If the banks have a genuine need to increase margins, then they should do it now, without the the RBA being an accomplice to circumventing the market. But we might find that banks can carry the current margins, with the markets likely to improve over coming months. The RBA can at any time reduce rates if needed, and be more confident that the full reduction will be passed on. They may choose that passage.
Of course, there is a good case for a rate reduction, including a much needed boost by way of relief to sluggish parts of our economy, such as tourism and manufacturing. Let's see what happens around 2:30 pm today. If only we were right 51% of the time!
Many are predicting a rate cut, but my opinion is - No! Reasons for the RBA to delay a cut:
1. Strong growth in some sectors of our market, where real estate and other prices are still too high. Job advertisements are up. The mining boom, which has had a recent resurgence, will see funds flow through to other areas of the economy.
2. The U.S. economy is slowly strengthening, with over 250,000 jobs created there last month. Germany is performing well albeit with large debt. China's demand is still insatiable. These factors will strengthen the U.S. dollar and lessen the case for a rate reduction.
3. All major banks have refused to ensure that the full reduction will be passed on anyway. If the banks hold on to any part of a reduction, it raises the question - Is it the RBA's role to reduce rates in order to increase the bank's profits? Clearly it's not. If the banks have a genuine need to increase margins, then they should do it now, without the the RBA being an accomplice to circumventing the market. But we might find that banks can carry the current margins, with the markets likely to improve over coming months. The RBA can at any time reduce rates if needed, and be more confident that the full reduction will be passed on. They may choose that passage.
Of course, there is a good case for a rate reduction, including a much needed boost by way of relief to sluggish parts of our economy, such as tourism and manufacturing. Let's see what happens around 2:30 pm today. If only we were right 51% of the time!
