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Feature Articles

 From 2012, we now list our articles in our Blog. Read the latest here

01/10/2008

Economic Update - Opposing Forces

 

Last month the Reserve Bank cut interest rates by 0.25% to 7.0%. Many in the business and wider community are now calling for further interest rate cuts in the coming months, due to weakening global economic conditions and the extreme volatility on global financial markets. However, the Reserve Bank has stated that there are “opposing forces” confronting the domestic economy. So, will the Reserve Bank be pressured into another round of interest rate cuts in the near term.

 
Many are currently arguing that the slowing consumer consumption, high oil prices and high interest rates have already worked to dampen demand and economic activity in Australia. In the six months to June, domestic retail sales had fallen by the biggest margin in six years, as consumers pulled back from discretionary expenditure. During July, oil prices increased to US$145 per barrel and even now oil is trading at approximately US$100 per barrel, 30% higher than twelve months ago and more than 250% above the level of five years ago. Additionally, the current financial market crisis has resulted in a global credit squeeze and higher financing costs, which will negatively impact our economy. Therefore, domestic demand is weakening more sharply than necessary and an interest rate cut of 0.50% is necessary.
 
The alternative argument is that the Australian economy remains strong, with low unemployment and solid business investment expenditure. In 1992 average unemployment was in excess of 10%, currently unemployment is holding at just above 4%. Additionally, despite recent falls in commodity prices, there is still solid external demand for Australia’s mineral resources and the Western Australian economy continues to grow. Therefore, by cutting interest rates by too much too soon the Reserve bank may reignite consumer demand and unleash higher inflation.
 
The global financial crisis has significantly impacted consumer and business confidence. We believe that on balance despite fears regarding higher inflation during the next six months the Reserve Bank will reduce interest rates by at least 0.25% this month.
 

Ross MacMillan holds a Bachelor of Commerce (Accounting, Finance and Systems) from the University of NSW, he is a member of the Institute of Chartered Accountants, member of the Securities & Derivatives Industry Association and a fellow of the Financial Services Institute of Australia.

Important Note: These articles have been prepared for general circulation and are circulated for general informational purposes only; these articles should not be regarded as business or investment advice. The articles represent the views of the writers and are subject to change without notice. Additionally, while every care has been taken in the preparation of the articles no representation or warranty as to accuracy or completeness of any statement is given. An individual or organisation should, before any business or investment decision is made, consider the appropriateness of the information in this document, and seek professional advice, having regard to objectives, situation and needs. This document is solely for the use of the party to whom it is provided.

 

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