What will the Reserve Bank of Australia do at their next meeting? This is the main topic of conversation all over Oz. From Breakfast tables, to Board Rooms, from Banks to Real Estate Offices the conversation has turned to interest rates. Australia is a land of gamblers and you can make book that someone will take a bet on the next move of the Reserve Bank.
Recently, there was an article about binary option brokers, adding Political Binary Option, where you could actually make an investment of the outcome of political elections, decisions or legislative outcomes. Interesting idea, but for another time.
Towards the end of 2011, the RBA initiated two consecutive rate cuts, which stimulated the markets and the economy. This stimulation also had negatives; it pushed housing prices and inflation upwards. There are always two side of the coin. Any central bank has to be a juggler, balances the effects of what they do to stimulate the economy, against the future effects it their decisions may have or the policy they will need to initiate or change to make the correction.
Australia is the perfect example, economic improvement from the rate cuts in 2011 were seen and felt immediately. The rate cut instantly stimulate the housing markets, investors eager to take advantage of low prices and lower mortgage rates, came back to the market in droves. They eventually pushed housing prices upwards, which was good for the investor, not so good for the private person looking to purchase a home. The local banks capitalized on the increased demand and increased mortgage rates, even though the RBA had not change their rate policy.
After the first of the year, the Reserve Bank decided to hold their current interest rate policy, at 4.25%, when analysts had expected another decrease, not due to promises by the central bank, but on economist and news analysts’ projections. Instead of blaming the analysts and economist, the markets turned on the RBA, blaming them. Most of the banks in Australia continue to raise their lending rates, independently; this again was blame on the RBA although they were not at fault.
Subsequently, the real estate investors left the market, as there they had no interest in higher priced homes, with higher mortgage rates. What they left behind in their wake were exactly what the RBA and the consumer and the economy did not want or need, higher housing prices, and higher mortgage rates.
The results of the Westpac surveys, which were released this week, emphasize the current risks to the Australian economy, particularly around the economy and the labor market.
The Westpac consumer sentiment fell by five per cent in March, from 101.1 in February to 96.1 in March. The index has now fallen below the level in October last year, prior to the Reserve Bank’s two rate cuts in November and December.
When the Index is below the 100 level, pessimists clearly outnumber optimists.
This pessimism is what effect economic recovery, but the RBA is not the one to hold at fault, but the public is expecting and almost demanding that the RBA cut rates at their next meeting. We’ll see if the Reserve Bank gives in to public demand or does what is best for the economy.