The Reserve Bank, rates cuts and a possible nasty turn.
August 2nd, 2008 · Greg Atkinson · 1 Comment
As I have mentioned on a few occasions I believe the RBA (Reserve Bank of Australia) went too far with their interest rate increases especially when a possible global downturn was on the radar. We now find ourselves in a situation where the RBA is focused on inflation (much of it beyond their control) whereas the real threat is that the Australian economy will stall.
If mining exports start to slow and/or prices for hard commodities decline, Australian could find itself in a very nasty position since the financial sector has already been hit hard.
Eventually the RBA will need to cut rates as it is becoming clear from the economic data that the Australian economy is slowing, but when they do cut we will see the Australian dollar take a major hit, especially against the Yen as Japanese investors bring their money out of Australian dollar investments. At this point Australia will not look quite as attractive as it once did for global fund managers and we could expect to see money flow out of some Australian stocks.
Companies that earn most of their money domestically will bear the brunt of any economic downturn, due to weaker domestic demand however Australian companies that earn a large part of their income from overseas operations should get a boost from a weaker Australian dollar and be able to ride any recovery in the U.S and Europe while still doing well from any exposure to Asia.
My outlook for the Australian economy for say the next 12 months or so is not very positive. The economy is being slowed by high interest rates (thanks to the RBA), the global credit crunch, a slowing global economy (even Asia seems to be slowing), higher oil prices (not great for tourism) and faces further threats to growth from a government that wants to burden the economy with carbon trading scheme that is being hastily implemented.
So hang onto your hats, we are in for a bumpy ride!