Tuesday, 2 December 2008

RBA Slashes Cash Rate to 4.25%

Cast your mind back to October 7th this year when the RBA pulled out a surprise 1% rate cut and the markets cheered pushing the XAO up more than 1% toward the 4600 level. At that time I noted that we had seen this movie before and to be:

wary of the dead cat bounces that inevitably follow rate cuts in this type of environment
So here we are today sitting 1000 points below the levels of early September and the we get another 1% rate cut , however this one couldn't even inspire a late afternoon rally, although it should be noted that the US was down almost -9% the previous evening.

Back in early September when the RBA tentatively cut the cash rate by 25 bps, I noted that they waffled on about inflation when inflation was not a problem at all, it was the slide toward deflation that was the concern.

So how is it that just 3 months ago the RBA was concerned about inflation and they have now cut the cash rate a full 3% since that time?

Quite simply the RBA is reactionary and data dependent, they are unable or unwilling like all central banks, to get out in front of a problem. But now that they have we can see that like the Fed, the RBA is a one trick pony, all they can do is try and reflate by cutting interest rates. However as has happened in the US that has little effect in a deflationary environment, and the reason why the Fed has now started to just print money.

Don't get me wrong, I'm not advocating that central banks should be able to anticipate problems and cut or raise rates well in advance. In fact I think central banks should be scrapped, or at least the futile exercise of interest rate tinkering should be done away with. My point is not to look to the central bank for forecasts about the future of the economy as they are always playing catch-up to reality.