Tuesday, 3 March 2009

RBA Keeps Rates Unchanged

The RBA decided to leave the cash rate unchanged at 3.25% at their board meeting today. From the statement by RBA Governor Glenn Stevens it seems clear that the RBA wants to sit back and evaluate the effect of the interest rate cuts and fiscal policy to date.

As usual, the RBA is behind the eight ball. The Rudd Government throwing money at people so they can buy houses and other stuff they can't afford and the RBA cutting interest rates when monetary policy is all but impotent, is not a recipe for an economic recovery.

As the global and therefore Australian economy continues to deteriorate into 2009, the RBA's hand will be forced into cutting interest rates again. To be clear, I'm not arguing that the RBA should have cut rates. I beleive, as was borne out in the US recently, that interest rate cuts do very little in a deflationary debt unwind.

It's quite possible that the Australian economy could sail through to the middle of the year on the back of Rudd Stimulus mark II in relatively good shape. January's retail sales numbers out today were no doubt buoyed by Rudd Stimulus no. 1.

However, once it becomes clear that the second half of 2009 is going to be worse than the first half, (I think it's already clear but the RBA will wait for the data to tell them it is) the RBA will be cutting rates again.