Bank Down Under : The RBA Rate Decision and the Aftermath

The Reserve Bank of Australia released its interest rate decision today. I had expected some major kangaroo-like jumping by traders… but the RBA, as expected, left rates unchanged at 3.0%. And how did the market react? Well… traders pretty much stayed put like Ayer’s Rock as the news release didn’t lead to much movement.

So why didn’t the RBA slash their rate? Let’s take a look back at what’s been happening in the Land Down Under. The current rate is at its lowest level in five decades after being chop-chopped from a high of 7.25% back in August 2008. However, a report recently indicated Australia is one of the few economies whose GDP posted an expansion (0.4%) during the first quarter of the year, avoiding a technical recession. This was some very encouraging news, as the local economy had been slaughtered during the start of the financial crisis. This expansion is probably the reason why the bank chose to stay on the sidelines first before doing any drastic actions such as a rate cut or a hike.

Along with the rate decision, the RBA gave its assessment – of which they were relatively upbeat – of the country’s economic health. According to Governor Glenn Stevens, the bank believes that the global economy is now showing signs of stabilizing with all the “less bad” data popping out here and there. Things aren’t as dim as they were during the December and March quarters. He mentioned that financial institutions are now strengthening their balance sheets, the global demand slump for Australia’s exports aren’t as weak as before and output and capacity utilization has bounced back to “average” levels.

Given all this, it seems that things have turned for the better! Well, I don’t know about that. It’s like a doctor telling a dying patient that his pace of death has just slowed down… or the pace at which the hole in ozone is getting bigger has slowed down, or…. Bah, you get the picture!

At this point in time, discounting future rate cuts would be… imprudent. If Australia’s credit conditions worsen again, the RBA still has a lot of room to move with regards to interest rates. Relative to its western counterparts… three percent certainly isn’t what would be “low.”

Up ahead, a bunch of economic reports are set to be released from Australia. Westpac consumer sentiment index, which gauges financial confidence and provides an outlook for future consumer spending, is due Wednesday 2:00am GMT. This index leapt from -4.3% in May to 12.7% in June, reflecting the rush of optimism after Australia dodged a recession for the first quarter of the year. This month’s reading could record another increase as consumers’ hopes of a strong economic rebound rise on strong economic data. Home loans for May, which are projected to be up by 1.3%, are also due on Wednesday.

Inflation expectations and data on labor conditions are in store for Thursday. Expectations about future inflation have been steadily increasing since the start of the year and were up by 2.8% in June. Employment change is expected to report 20K in job losses for June, following a 1.7K decrease in employment last May. This could send the unemployment rate surging from 5.7% to 5.9% and thus dampen hopes of a steady recovery for Australia.

As you can see, things still aren’t black and white like a koala, as the overall direction of economic data still remains in the grey. So while Australia has been one of the countries to be “less affected” by the economic downturn, only time will tell whether the economy can continue to avoid the recession’s crocodile-like bite like Steve Irwin (may he rest in peace) did so many years ago.