Financial markets are now certain that the Reserve Bank will slash rates over the next couple of months following the turmoil on global markets and increasing fears about a financial meltdown.
Traders are now placing a 51 per cent chance on a 0.25 per cent cut at next month’s RBA board meeting. But if the RBA doesn't act in October, the money markets are now saying that there is a 100 per cent chance of a double-sized 0.50 per cent cut at the November meeting.
Global stock markets tanked yesterday, with the Dow Jones Industrial Average slumping by 3.5 per cent and the S&P500 falling by 3.2 per cent, representing the US’s worst two trading days since the height of the global financial crisis in 2008. Businesses And Investors Urged To Prepare For Crash)
Markets in Europe were also down by up to 5 per cent.
Almost every asset class fell sharply - shares, oil, commodities, even gold. The only thing that rose was the US dollar because it’s seen as the only safe haven.
As a result, the Aussie dollar has fallen to just US96.2 cents, well below parity and likely to fall further in the near term, especially if the RBA does indeed cut rates.
In addition, a survey by the Australian Industry Group showed that Australian manufacturing was contracting at an even faster rate, sending shockwaves through the domestic market and prompting Westpac to call on the Reserve Bank to cut rates immediately.
Chief economist Bill Evans, who has been urging a cut for several weeks, said: "It’s time to ease financial conditions." (Sign Up To Kochie's Newsletter)
The news is bitter-sweet for Australian homeowners and businesses. A rate cut will give welcome relief on debt repayments but if fears about the global downturn continue, the impact on the economy could be disastrous, leading to rapidly increasing unemployment.
"The Federal Reserve made a statement on Thursday that it saw downside risks for the global economy and this has spread panic around the world" said Shane Oliver, chief economist at AMP Capital. "Markets are worried that Europe’s banks are in danger of collapsing because of their exposure to heavily indebted governments. In turn, US markets are worried about US banks’ exposure to European banks. The worry is that there could be a domino-style collapse."
If that happened it would herald a return to a GFC-style freeze in financial markets and global credit crunch, and rates would most likely be slashed very aggressively. (Follow Kochie's Business Builders On Twitter)
However, Oliver says that the money markets could be over-reacting. "There is always the chance that stock markets will settle down over the next few weeks, the panic will settle and that will buy the RBA more time" he said.
"But we still think the RBA will be forced to cut in November. The question is simply by how much."
28 Comments
Just what i need. The banks have destroyed the ASX with their insider trading with their wholly owned Superannuation/Finance companies. My home is supposedly going to be worth 30% less in the next year and now what little nest egg I have left in a term deposit is going to go down the gurgler as well. Now Swanee tell me how great the Australian economy is for retirees who are self funded . I'm looking at the pension now in the very near future now you have allowed the banks to destroy the...
ReplyIf you have a mortgage there's a good chance you are paying too much.I'm a mortgage broker and have access to all the major banks and non bank lenders and would be happpy to see if i can save you some money by refinancing.As an example,one of the major banks is offering 1%pa discount off their variable rate for the life of the loan--so on a loan of say $500,000 thats $5000pa.Feel free to email me at searchfinance@y7mail.com to see if I can save you some cash--oh and thanks yahoo for the...
1 ReplyThe arrogance of the million dollar man , Glen Stevens. The RBA doesn't pay a dividend back to the Commonwealth. He's held interest rates the highest in the Western World. The foreclosure bubble is just under the surface, and finally this stooge, might cut interest rates. No body can borrow, the banks are tight as, and Stevens is like Nero who watched Rome burn. Pontificating about how good a shape the Australian Economy is. He should talk to the real people who are trying to sell...
Replythe RBA is too stupid to cut rates. they still think that everyone is benefiting from the mining industry. it would make them look even more stupid if they did cut because every man and his dog could see it needed to be done months ago
ReplyI would like "Kochie" to explain to me how the Dow is 1% up for the last 12 months and the ASX DOWN 14%. How can this be if Australia is the best economy in the world and the US pretty much the worst after greece. Help me out here please. Surely it aint the banks plundering the ASX even if they own 75% of all shares on the ASX.
2 Repliesit's going to be cut the dollar has come down
ReplyYES! About time.
Replysorry cant see rates being cut at all and if they did would your bank cut rates when funding becomes dearer i dont think mine will as when the gfc was here how many rate cuts were not passed on by the banks about .75 to 1% so dont get your hopes up people you may well be dissapionted and i hope i am wrong but i dont think so
Reply...and a december election would be the icing on the cake
Replyjust because the RBA says jump, the banks don't have to do anything, they can all put them up if they want, the RBA are a completely usaeless bunch of scabs
Reply