RBA cuts official interest rates by 1 percent

Interest Rates cut by 1 per cent

Today the RBA cut the official cash rate by one hundred basis points, from 7% to 6%. This moved stunned the local market, which was expecting half a point cut. This is the largest cut in rates since May 1992.

I think this move by the RBA highlight their concern for the global economy and the recent events in the United States and Europe. They know confidence in Australia could quickly erode and the global liquidity crisis will likely get far worse, and spread to more countries. Australian interest rates are clearly too high in the current environment and today's move is very assertive.

Australian Dollar

A couple of months ago the media was talking up parity with the US Dollar. As I write its fallen to around US$67c. This is a huge fall in such a short space of time.

The main reason why the Australian Dollar is falling heavily is two fold:

a) The US Dollar is has been appreciating due the illiquidity in the world money markets. US money supply growth has been contracting fast. People are expecting property prices, share prices etc. to fall, and are holding off getting new loans. There is now less US dollars chasing assets.
b) Commodity prices, in particular, have fallen sharply in recent weeks due to expected lower global demand (in China and elsewhere) for commodities, and due to less money floating around (liquidity). Zinc and nickel have been in long-term trends, but now the rest are following suit. Australia is heavily reliant on commodities for its export income, and further expectations of falling prices is driving the Australian Dollar lower.

One benefit of the Australia dollar falling is that Australian should now spend a lot less on imports. We have been binging on the commodities boom and the high Aussie dollar. Our wallet will not go as far this Christmas.