The Reserve Bank of Australia has surprised the market with a full 1 per cent rate cut, fuelling speculation that the Australian economy is not as sound as has been projected.
Pundits had been predicting a 75 basis point cut, but were surprised when Reserve Bank Governor Glenn Stevens announced a full 1 per cent cut, taking the interest rate to 4.25 per cent, its lowest in over 40 years.
Dr Nick Economou, lecturer in politics at Monash University, said the dramatic cut was an indication of tough times ahead.
“The rate cut was a full 1 per cent. We go further down. It is yet another sign that the Australian economy is in trouble,” Dr Economou told The Epoch Times.
Mr Stevens warned that with “financial turbulence” affecting confidence, the private sector would be more “subdued”.
“The Australian economy has been more resilient than other advanced economies, but recent data nonetheless indicate that a significant moderation in demand and activity has been occurring,” he said.
Recent data from the Australian manufacturing industry indicated activity had slumped to a record low of 32.7.during November. A figure below 50 is considered to indicate a contraction.
Australian Industry Group Chief Executive Heather Ridout says new orders have slumped to their lowest level on record.
“It’s a shocker. It’s a very, very weak number – the worst on record,” she said on ABC.
“We have been collecting the records for 16 years. All 12 sectors of manufacturing recorded a decline in November and that follows a very weak October.”
Annual economic growth has also slowed over the September quarter with official figures predicted to be 1.9 per cent from a previous 2.7 per cent.
Banks must pass on cut
Dr Economou said the Reserve Bank would be concerned about declining business confidence and it would be imperative that the “Big Four” banks pass on the full 1 per cent rate cut.
The banks have refrained from passing on the full percentage in the last four cuts, he said, raising concerns that, like the Great Depression, investment money from the banks will dry up, leaving businesses in an unsustainable position.
“The Reserve Bank is trying to encourage the banks to keep open the credit lines for business,” he said.
Treasurer Wayne Swan said the cuts had come at a crucial time and he was expecting the cuts to be passed on in full.
“This is a vital rate cut from the Reserve Bank delivered at time when all our joint efforts are directed towards strengthening the economy and protecting Australian jobs,” he told Parliament.
Mr Swan said that the Commonwealth Bank had announced that it will pass on the full 1 per cent.
“This means that someone with a $300,000 mortgage at the Commonwealth Bank will receive a monthly saving on their mortgage of $193 per month,” he said.
Dr Economou said unemployment figures were the biggest concern, particularly if there were indications unemployment was spreading beyond the finance sector. The post Xmas period, when school leavers traditionally flood the market and business is notoriously quiet, would be a telling period.
Australians in delusion
Dr Economou said he believed the Australian population had still not grasped the gravity of the economic situation. There is a “sense of disconnect” in the community between the normality of what people are experiencing and what they are hearing in the media.
He believes that much hope for the future hinges on the new administration in the US.
Australian resources were reliant on the Chinese economy, but China was experiencing “a dramatic slowdown in exports” as the US economy came to a standstill, he explained. The present US administration seemed at a loss to resolve the problem or how to deal with America’s growing deficit.
“We can only hope that the Obama administration has a clearer sense of what to do,” Dr Economou said.
