# Aust. low inflation & RBA meeting 01 May 2012



## Timmy (24 April 2012)

> Consumer prices rose by 0.1 per cent in the first quarter of 2012, following a flat reading in the fourth quarter of 2011.
> 
> For the year to March 2012, inflation increased by 1.6 per cent



Source: http://www.smh.com.au/business/consumer-prices-barely-rise-20120424-1xibl.html

Much more detail on the release here:
http://www.abs.gov.au/ausstats/abs@.nsf/mf/6401.0?OpenDocument


With such a low measure of inflation, what's to stop an RBA rate cut?
I asked the same question before the last RBA meeting. The answer seemed to be "Wait and see what the inflation figs are like on Apr. 24."
Well, they're out, showing low inflation.

Is a better question now "What's it to be, a 0.25 or 0.5 cut?"

Any thoughts?


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## tinhat (24 April 2012)

Every analyst and economist in the country is having an imaginary conversation in their head with Glen Stephens saying "I told you!".

Reminds me of the epitaph on Spike Milligan's grave stone "I told you I was ill".

I had a chuckle at Marcus Padley's comments on ABC TV on Sunday morning that retail and manufacturing were burning down but the RBA decides to wait to see the CPI figure before deciding on a cut.

I only hope that the RBA has been given a peak at the upcoming budget, because if it is going to be the horror we have been promised they better take that in mind to and start getting a little pre-emptive again (as they were during the GFC). As I said on these forums the other day my prediction is that 25 basis points will not change consumer sentiment. My guess is that we will see 25 points in May and 25 points again later on.


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## joea (24 April 2012)

0.50%. Any lower will be just a waste of effort.
joea


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## McLovin (24 April 2012)

They'll cut but I don't think it will make a difference. People aren't paying down their debt and saving more because of a few measley basis points. By historical standards rates are already low. The usual talking heads will discuss how it adds an extra $xx/week to the family budget but unlike in the past, I doubt this is going to go toward buying a new big screen TV.


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## Julia (24 April 2012)

McLovin said:


> They'll cut but I don't think it will make a difference. People aren't paying down their debt and saving more because of a few measley basis points. By historical standards rates are already low. The usual talking heads will discuss how it adds an extra $xx/week to the family budget but unlike in the past, I doubt this is going to go toward buying a new big screen TV.



+1.


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## young-gun (24 April 2012)

McLovin said:


> They'll cut but I don't think it will make a difference. People aren't paying down their debt and saving more because of a few measley basis points. By historical standards rates are already low. The usual talking heads will discuss how it adds an extra $xx/week to the family budget but unlike in the past, I doubt this is going to go toward buying a new big screen TV.




+2 people dont spend because the rba gives them a bit of play money, people spend because they need to(or think they need to)...central banks DO NOT control economies.


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## McLovin (24 April 2012)

young-gun said:


> +2 people dont spend because the rba gives them a bit of play money, people spend because they need to(or think they need to)...central banks DO NOT control economies.




The last 25 years would indicate otherwise.


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## Uncle Festivus (24 April 2012)

Why does the RBA have to cut at all? The level of interest rate is not the problem. If consumers & the whinging fringe mortgage holders can't handle rates at this level then lowering them more is not going to make any difference ie exhibit A - the rest of the world with zero bound policies. The other 70% of consumers with a vested interest in having high rates to which to live off apparently don't get to have a say? All we hear on monthly rotation on A Current Affair is how hard the battlers are doing paying off their over-extended lifestyles?

I hope the RBA stands their ground.


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## joea (24 April 2012)

Uncle Festivus said:


> Why does the RBA have to cut at all? The level of interest rate is not the problem. If consumers & the whinging fringe mortgage holders can't handle rates at this level then lowering them more is not going to make any difference ie exhibit A - the rest of the world with zero bound policies. The other 70% of consumers with a vested interest in having high rates to which to live off apparently don't get to have a say? All we hear on monthly rotation on A Current Affair is how hard the battlers are doing paying off their over-extended lifestyles?
> 
> I hope the RBA stands their ground.




Uncle Festivus.
You are drinking the wrong brand.
joea


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## joea (24 April 2012)

McLovin said:


> The last 25 years would indicate otherwise.




+1.
Someone understands reality!!
joea


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## Miss Hale (24 April 2012)

Even if the RBA cut the interest rate (which I think they will) I wouldn't expect it to do anything dramatic (like re-ignite the housing market or stimulate the economy due to increased spending) as two previous cuts had virtually no effect.  People need a lot more than an interest rate cut at this late stage to feel confident about the economy and their own personal financial situation I feel.  Most people have the wind up at the moment I think due to things such as impending carbon tax and accompaning rise in cost of living, stagnating real estate market, recent retrenchments in various industries.


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## young-gun (24 April 2012)

McLovin said:


> The last 25 years would indicate otherwise.




Apologies. Meant to say they should not attempt to!* and ultimately they most definitely do not control economies. We are currently at the beginning of the result of their collective interferences.


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## young-gun (24 April 2012)

joea said:


> +1.
> Someone understands reality!!
> joea




I sorry but are you actually saying you support their meddling?


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## Knobby22 (24 April 2012)

young-gun said:


> I sorry but are you actually saying you support their meddling?




They have aims, they have met them, it has been great for Australia, what would you do?


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## McLovin (24 April 2012)

young-gun said:


> I sorry but are you actually saying you support their meddling?




In terms of it being used to smooth the cycle then yes. I don't think central banks exert as much influence as they are often given credit for. That's why I don't think a cut will actually _reverse_ the downtrend it will merely flatten it out.

I'm sure the bloke from outer-space will be here shortly to bring us up to speed on how all this actually works.


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## doctorj (24 April 2012)

Has anyone seen any research that tries to work out how much of the impact of a rate change arises from households vs corporates?  I understand why Today Tonight (is that still running???) might like to quote how much a struggling lower-middle class family will be effected on their mortgage payments, but is that significant at the macro level relative to the impact on corporates who often have their loans set at a base rate + margin?


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## sammy84 (24 April 2012)

Miss Hale said:


> Even if the RBA cut the interest rate (which I think they will) I wouldn't expect it to do anything dramatic (like re-ignite the housing market or stimulate the economy due to increased spending) as two previous cuts had virtually no effect.




Not entirely correct. Check what it has done to clearance rates in Melb. They aren't soaring back but certainly have steadied and have risen somewhat since the last 2 interest rate cuts. I understand this comment is likely to bring all those property bears out of their caves so this is all I have to say about the housing market recovery.


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## Eager (24 April 2012)

joea said:


> 0.50%. Any lower will be just a waste of effort.
> joea



+1.

.25% movements seem to be the default nowadays and have little effect month-on-month. With no change for the previous 6 months a .5% decrease will provide stimulus (even if the minority of Australians with a mortgage, me included, will probably only see a .3% decrease or thereabouts). Such a decrease will not only be attractive for prospective borrowers, residential or business, but will allow an increase in economy-building discretionary spending that would otherwise not occur with a smaller interest rate cut. 

Does anyone else have an opinion on which components should make up the official inflation figures? I am a little worried that the list of increases and decreases detailed in *Timmy*'s link shows that all of the significant price rises were due to increases in the cost of essentials, and apart from fruit, the most significant price falls were due to discretionary items. Should such items as furniture, appliances and non-business domestic and international travel be really included in the calculations?


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## Julia (24 April 2012)

Uncle Festivus said:


> Why does the RBA have to cut at all? The level of interest rate is not the problem. If consumers & the whinging fringe mortgage holders can't handle rates at this level then lowering them more is not going to make any difference ie exhibit A - the rest of the world with zero bound policies. The other 70% of consumers with a vested interest in having high rates to which to live off apparently don't get to have a say? All we hear on monthly rotation on A Current Affair is how hard the battlers are doing paying off their over-extended lifestyles?
> 
> I hope the RBA stands their ground.



+1.
And let's remember that the banks are under no obligation to pass on any rate cut.
It's a bit difficult to imagine the housing market soaring on the basis of a .25 rate cut!  

I can't quite understand all the joy about today's inflation figures since the low apparently occurred because of a dramatic fall in fruit and vegetables.  Surely this is just a seasonal factor with a glut of quite a few items.  I doubt the RBA would be especially influenced by such a seasonal factor.

If they do cut next week, the government will take all the credit.
Along with all the ubiquitous economists who cast predictions everywhere with great self importance.  Haven't they more often been wrong than right?

Sigh!



Miss Hale said:


> People need a lot more than an interest rate cut at this late stage to feel confident about the economy and their own personal financial situation I feel.  Most people have the wind up at the moment I think due to things such as impending carbon tax and accompaning rise in cost of living, stagnating real estate market, recent retrenchments in various industries.



Agree.


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## doctorj (24 April 2012)

Julia said:


> +1.
> And let's remember that the banks are under no obligation to pass on any rate cut.
> It's a bit difficult to imagine the housing market soaring on the basis of a .25 rate cut!



This was my point below - it's not the role of the central bank to use interest rates to manage house prices.


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## Smurf1976 (24 April 2012)

I'd argue that inflation within the Australian economy has in recent years been much higher than the RBA acknowledges.

Looking at the CPI, those things which are either imported or are subject to technology or industry change have shown price falls that is true. But for things where it is simply a case of producing an unchanged product or service domestically, costs seem to be going up, up and up some more.

Anyone checked their electricity bill lately? Or gas? Or council rates? Insurance? Water? The cost of housing now versus a decade ago? General business expenses? Restaurant meals? Hair cuts? Bus fares? Hotel rooms?

Where, exactly, is this low inflation? I don't actually need a new TV every week.


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## joea (25 April 2012)

young-gun said:


> I sorry but are you actually saying you support their meddling?




Why would they be meddling, when it's their responsibility to ensure inflation stays in a band of 2 -3 %.
The RBA looks at a number(long list) of statistics, before they make the change.
Now that is where the meddling starts, (the word statistics.)
We even have two levels of inflation.(that's meddling.)

One of the item's is unemployment rate. ABS has it at 5.3% and Roy Morgan has it at slightly below 10%. Which is correct.? I am sure that the ABS in not correct, because Labor has altered the reference is what is unemployment.(that's meddling).
Australia has not got a problem with high inflation, it has a future  problem with a recession with Labor in charge.

The economy of Australia will only improve with "Touch" control. By that I mean what they change must work in with other control measures.
Currently we have the RBA adjusting the rate figure, while we have "the worlds greatest treasurer" taxes us into a tail spin. That is not complementary control. (WOOPS, SORRY NOT TAXING, "REFORM")

Gillard and Swan do not know how to control our economy!! All Labor is proficient at is spending the tax payers money "willy nilly".

The "cogs" of a sound economy are the state economies. But those cogs are not all turning in the same direction. When they do, them we have to get them to their correct contributing speed. "THAT IS WHEN WE WILL HAVE A PROBLEM WITH INFLATION."

What my concern is that Labor may stumble on to the "right technique" before they can be tossed out of Government. Currently Labor's objective is not to control the economy, it is to tax everybody and every business to ensure it has a suitable "cash flow" to stay in government. i.e. Carbon tax.
Labor does not even talk about it's current deficit, Labor is talking about a surplus in the future.(hope, hope, hope it will come good. sorry Wayne not in your hands.)
joea


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## young-gun (25 April 2012)

joea said:


> Why would they be meddling, when it's their responsibility to ensure inflation stays in a band of 2 -3 %.
> The RBA looks at a number(long list) of statistics, before they make the change.
> Now that is where the meddling starts, (the word statistics.)
> We even have two levels of inflation.(that's meddling.)
> ...




*sigh* this is not a labor bashing thread, please take your political bull**** somewhere else.


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## prawn_86 (25 April 2012)

Smurf1976 said:


> Where, exactly, is this low inflation? I don't actually need a new TV every week.




A lot of it comes from changing the CPI basket. As i understand it for example, 20 yrs ago say chicken breast was included in the basket, now it is chicken mince.


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## young-gun (25 April 2012)

Knobby22 said:


> They have aims, they have met them, it has been great for Australia, what would you do?




they achieve their aims in the short term absolutely. but every time they try to prevent the economy from doing what it wants to(mainly in regards to deflation) they try to prevent it, and alot of the time this is achieved through stimulus and rate cuts. this isn't natural, and as i stated, we are now experiencing the result of a bunch of people who think they can direct an economy towards non-stop growth over the past few decades. one HUGE global economic bubble, which is trying to deflate. 

a few small to medium recessions that were fought off by real underlying growth and economic strength would have been far better than what we are staring down the barrel of now.

their efforts will be futile this time. and what they do with rates at this point in time is irrelevant imo, it will have minimal(if any) desired affect.


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## young-gun (25 April 2012)

Smurf1976 said:


> I'd argue that inflation within the Australian economy has in recent years been much higher than the RBA acknowledges.
> 
> Looking at the CPI, those things which are either imported or are subject to technology or industry change have shown price falls that is true. But for things where it is simply a case of producing an unchanged product or service domestically, costs seem to be going up, up and up some more.
> 
> ...




this is where I do agree with joea, the methods of calculating inflation are laughable, in no way accurate, and virtually useless.


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## moXJO (25 April 2012)

will the banks even pass on the cuts?
I say drop the bomb .75% cut
Business is on the slide and its hitting the governments tax take


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## Tyler Durden (25 April 2012)

young-gun said:


> they achieve their aims in the short term absolutely. but every time they try to prevent the economy from doing what it wants to(mainly in regards to deflation) they try to prevent it, and alot of the time this is achieved through stimulus and rate cuts. this isn't natural, and as i stated, we are now experiencing the result of a bunch of people who think they can direct an economy towards non-stop growth over the past few decades. one HUGE global economic bubble, which is trying to deflate.
> 
> a few small to medium recessions that were fought off by real underlying growth and economic strength would have been far better than what we are staring down the barrel of now.
> 
> their efforts will be futile this time. and what they do with rates at this point in time is irrelevant imo, it will have minimal(if any) desired affect.




Sorry for asking a really basic question, but why does the RBA need to react to low inflation figures? I thought too high an inflation rate would be a problem, but the reverse?


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## young-gun (25 April 2012)

Tyler Durden said:


> Sorry for asking a really basic question, but why does the RBA need to react to low inflation figures? I thought too high an inflation rate would be a problem, but the reverse?




http://www.bankofengland.co.uk/educ...tzero/mpframework/currentInflationTarget.aspx


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## IFocus (25 April 2012)

Lets face it the RBA have some minimal control over inflation / economy and governments virtually no control in the short term and there is endless research that shows this.

Over the long term both can really screw up the system as we can see the effects / results in the US / Europe and this is where the real damage is done if they get it wrong.

The levers that the RBA do have are really just a very blunt axe with a short handle IMHO.


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## young-gun (25 April 2012)

IFocus said:


> Lets face it the RBA have some minimal control over inflation / economy and governments virtually no control in the short term and there is endless research that shows this.
> 
> Over the long term both can really screw up the system as we can see the effects / results in the US / Europe and this is where the real damage is done if they get it wrong.
> 
> The levers that the RBA do have are really just a very blunt axe with a short handle IMHO.




+1, as you said its evident int he US. interest rates are at record lows, and will be for years, strangely enough we arent seeing it pick up? over 1 trillion of stimulus, barely kept their heads above water so far. 

I think they are quite capable of staving of minor recessions and gluts of poor growth with BIG rate cuts, but whats happening is quite clearly out of everyones control now.


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## McLovin (25 April 2012)

young-gun said:


> a few small to medium recessions that were fought off by real underlying growth and economic strength would have been far better than what we are staring down the barrel of now.




Yes, I agree with you. That's the reason why for the last 25 years any recession has been fought by increasing debt. Recessions are good things, they flush out the ineffieciencies that build up in an economy. 

The biggest issue with Australia now is the lack of productivity growth. We haven't had it in 10 years. I can't see the current batch in Canberra (on either side) getting stuck into any serious microeconomic reform though, sadly.



young-gun said:


> their efforts will be futile this time. and what they do with rates at this point in time is irrelevant imo, it will have minimal(if any) desired affect.




I agree. Most people still don't seem to understand the structural nature of what is happening wrt debt at the moment.


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## jet328 (25 April 2012)

Instead of worrying about how much to cut by, the RBA board should just sack themselves and close the RBA.

If the government came out tomorrow and said they were going to set the prices of houses, cars or food most people would think it was completely ridiculous. How is money any different? What gives the RBA the impression they know more than everyone else?

The amount of money should be fixed and then let the markets work out the price themselves just like the used card market, forex market or the property market. If we are in a boom and every man and his dog is trying to load up with borrowed dough, interest rates will naturally rise due to supply and demand. The reverse in a recession.

Just look at the destruction central banks have created recently. Think back to 2000 and the tech wreck. The US needed a decent recession to clear the misallocation after the dot com bubble. Instead, the Fed dropped interest rates to get things 'going' again. We all know about the bubble and massive misallocation and malinvestemnt that one caused.

How many disasters can you see being created at the moment? Its hard to see the Fed's, ECB's, BOE & BOJ entry into the government bond market ending well.... Instead of dealing with the problem and taking the pain now, they are simply kicking the can down the road and creating an even bigger disaster for someone else.

Not to mention that their constant money printing has decreased the living standards of all Australians.
Take the same house that was worth in $20k in 1970 and now $1million today. A great 'investment' and I would agree at the individual level. But this system of constantly producing more and more dollars has turned us into and rewarded us for being speculators. Its just common sense, if money is being printed and land isn't. Consider now that the same house is still worth $20k in 2012. How many of us would been encouraged and rewarded for speculating on an existing property? Instead over those years its likely we would have put the investment in more productive things that  increased Australia's productive capacity like railways, ports or businesses. This would have increased Australia's standard of living.


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## Miss Hale (25 April 2012)

sammy84 said:


> Not entirely correct. Check what it has done to clearance rates in Melb. They aren't soaring back but certainly have steadied and have risen somewhat since the last 2 interest rate cuts. I understand this comment is likely to bring all those property bears out of their caves so this is all I have to say about the housing market recovery.




I am somewhat sceptical of clearance rates as they are supplied by estate agents and cannot be guaranteed as accurate. The survey referred to in the following article indicates that people were not positively influenced by the two previous drops in interest rates.

http://www.bigpondmoney.com.au/nati...er-caution-in-2012?cid=ZBP_MON_headline_1503A


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## joea (26 April 2012)

young-gun said:


> please take your political bull**** somewhere else.




Maybe you should pass this comment on to Wayne Swan the next time he bashes the banks to pass on the full rate decrease. (meddling) that was what my comment was related to.

joea


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## Timmy (26 April 2012)

Some interesting thoughts, certainly a rich tapestry.
Just to single out a few:





tinhat said:


> Reminds me of the epitaph on Spike Milligan's grave stone "I told you I was ill".
> 
> I had a chuckle at Marcus Padley's comments on ABC TV on Sunday morning that retail and manufacturing were burning down but the RBA decides to wait to see the CPI figure before deciding on a cut.



Spike Milligan quotes welcome anywhere! LOL
Retail & manufacturing would seem to benefit. To the extent that a lower interest rate will impact on the exchange rate at the margin it will be a boost to an export businesses and import-competing ones. I am surprised we haven't heard more from the powerful farmer/rural lobby about the benefit (or otherwise?) of cutting rates?




McLovin said:


> They'll cut but I don't think it will make a difference. People aren't paying down their debt and saving more because of a few measley basis points. By historical standards rates are already low. The usual talking heads will discuss how it adds an extra $xx/week to the family budget but unlike in the past, I doubt this is going to go toward buying a new big screen TV.



McLovin, I read your comments fairly widely (correct me if I was wrong to), but it seems to me that if a person ends up with a few extra dollars from a rate cut they will either spend them or save them (or some combination of the two), I don't follow you when you say neither will occur? 



doctorj said:


> Has anyone seen any research that tries to work out how much of the impact of a rate change arises from households vs corporates?  I understand why Today Tonight (is that still running???) might like to quote how much a struggling lower-middle class family will be effected on their mortgage payments, but is that significant at the macro level relative to the impact on corporates who often have their loans set at a base rate + margin?



Tks Doc., surprised there wasn't more comment on how a lower cost of funding could be of benefit to business.



Smurf1976 said:


> I'd argue that inflation within the Australian economy has in recent years been much higher than the RBA acknowledges.
> 
> Looking at the CPI, those things which are either imported or are subject to technology or industry change have shown price falls that is true. But for things where it is simply a case of producing an unchanged product or service domestically, costs seem to be going up, up and up some more.
> 
> ...



Nice point Smurf. When I asked:



Timmy said:


> With such a low measure of inflation, what's to stop an RBA rate cut?



it wasn't rhetorical, so appreciate what you have said. Valid point indeed. The RBA have discussed the difference in inflation between tradeable and non-tradeable goods, which I think is sort of what you are referring to here. Difficult issue for them to wrestle with.


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## young-gun (26 April 2012)

joea said:


> Maybe you should pass this comment on to Wayne Swan the next time he bashes the banks to pass on the full rate decrease. (meddling) that was what my comment was related to.
> 
> joea




Even if I was given the chance I wouldn't waste my time or breath


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## McLovin (26 April 2012)

Timmy said:


> McLovin, I read your comments fairly widely (correct me if I was wrong to), but it seems to me that if a person ends up with a few extra dollars from a rate cut they will either spend them or save them (or some combination of the two), I don't follow you when you say neither will occur?




I think you may have misinterpreted what I said, probably because I worded it wrong.



> People aren't paying down their debt and saving more because of a few measley basis points.




I meant people _are_ paying down their debt and saving more but not because interest rates are high, just because they are averse to debt. A fall in interest rates of 25-50bp won't change that behaviour, IMO.


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## Timmy (26 April 2012)

McLovin said:


> I think you may have misinterpreted what I said, probably because I worded it wrong.
> 
> 
> 
> I meant people _are_ paying down their debt and saving more but not because interest rates are high, just because they are averse to debt. A fall in interest rates of 25-50bp won't change that behaviour, IMO.




Yes, I did misinterpret - tks for that.


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## doctorj (26 April 2012)

Timmy said:


> Tks Doc., surprised there wasn't more comment on how a lower cost of funding could be of benefit to business.



I guess because most people have houses and few have businesses.  Even if someone owns a business, on average only 15-20% of an SME's funding tends to be in the form of bank debt, so its likely to be a minimal impact on that front too...

It will impact the larger businesses, but that's probably outside anything that's easily and directly observable.


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## Starcraftmazter (27 April 2012)

Timmy said:


> With such a low measure of inflation, what's to stop an RBA rate cut?




Common sense. Warwick McKibbin was on some show this week saying that rate cuts wouldn't do crap, and I agree.

The only thing that they could do is bring forth some demand in housing. And that's a very very bad thing.

Unfortunately Stevens will have to worry about assassination attempts if he doesn't lower 

I am hoping it's only 25bps and it's all gobbled up by the banks and none given to speculators...sorry I mean mortgagees. That would be good.


Let's face it - all low rates do is create malinvestment and speculation. They will not help our economy, for that wages need to dramatically fall and so does the AUD. Lower rates will not achieve *both* of these, in fact rates need to rise to achieve both.


Also I will note that all the things that matter in the CPI rose significantly - housing, transport, healthcare and education. Food is just being seasonal - and quite frankly, the RBA own us for completely failing to keep inflation under control for the last several years. And this is quite remarkable, considering they have the highest inflation target of any central bank in the developed world.

No, I demand a deflationary spiral and a depression before tomorrow morning. That is the only thing which will benefit Australia economically in the coming decades.


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## moXJO (27 April 2012)

Starcraftmazter said:


> Let's face it - all low rates do is create malinvestment and speculation. They will not help our economy, for that wages need to dramatically fall and so does the AUD. Lower rates will not achieve *both* of these, in fact rates need to rise to achieve both.
> 
> 
> .




Could you explain why higher rates = lower AUD


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## Starcraftmazter (27 April 2012)

moXJO said:


> Could you explain why higher rates = lower AUD




Certainly. Higher rates will pop the housing bubble very nice and quickly, plunge the economy into a prolonged recession (this is inevitable - we would simply stop delaying it and face it already), and thus our dollar would fall to 60ish cents where it belongs.

We can lower rates once it happens by the way to ensure our currency is not prime for speculation.


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## doctorj (28 April 2012)

Starcraftmazter said:


> Certainly. Higher rates will pop the housing bubble very nice and quickly, plunge the economy into a prolonged recession (this is inevitable - we would simply stop delaying it and face it already), and thus our dollar would fall to 60ish cents where it belongs.
> 
> We can lower rates once it happens by the way to ensure our currency is not prime for speculation.



This is rather novel.


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## Starcraftmazter (28 April 2012)

doctorj said:


> This is rather novel.




Yes, it is quite simply isn't it.


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## young-gun (29 April 2012)

Starcraftmazter said:


> Yes, it is quite simply isn't it.




its a shame common sense does not seem to prevail


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## tinhat (29 April 2012)

Starcraftmazter said:


> Food is just being seasonal...




Actually, the seasonally adjusted figure came in lower at -0.2% The trimmed mean came in at 0.3% for the quarter and the weighted mean at 0.4% so on any of those measures we can say that inflation is at the lower end of the target range.



> No, I demand a deflationary spiral and a depression before tomorrow morning. That is the only thing which will benefit Australia economically in the coming decades.




What about throwing in some good old fashioned strong man fascism and a war?


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## tinhat (30 April 2012)

Tyler Durden said:


> Sorry for asking a really basic question, but why does the RBA need to react to low inflation figures? I thought too high an inflation rate would be a problem, but the reverse?




The CPI is based on a sample data set. Modelling CPI is a slightly contentious issue. When we do end up with a figure it is backward looking. Note that the ABS publishes several CPI figures but the one most widely reported and commented on is the headline rate. Underneath the headline rate, different sectors of the economy will have performed differently; some sectors are currently experiencing deflation as any retailer will attest to.

The contemporary wisdom amongst economists is that deflation is to be avoided at all costs. Inflation is bad but deflation is worst. Deflation causes spending and investment to be postponed in anticipation that things will get cheaper, reducing demand further.

Economic growth is required to maintain full employment. To achieve economic growth, demand must grow. In the short run at least, markets cannot allocate resources at theoretical equilibrium. The best explanation I can give for targeting a moderate rate of inflation is the little bit of friction in the system that one expects in reality (although theoretically, markets should operate at zero friction).

So while in theory zero inflation might be good, in practice we expect a healthy economy to display a moderate rate of inflation and we expect monetary policy to keep economic activity away from the dangerous zone of deflation.


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## Starcraftmazter (30 April 2012)

TD inflation came in at 0.3% for April (0.5% for March).

I'm really hoping it will be no more than 25bps and the banks just tell people to piss off.


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## McLovin (30 April 2012)

tinhat said:


> The best explanation I can give for targeting a moderate rate of inflation is the little bit of friction in the system that one expects in reality (although theoretically, markets should operate at zero friction).




This is pretty much the issue. Prices can fall quickly but imagine a government trying to _lower_ the minimum wage in reaction to falling prices. So in a period of falling prices, firms profit margins will bare the cost. It also stops investment; why invest in that new plant today when it will be cheaper tomorrow.

Most deflationary environments are linked to some pretty nasty underlying microeconomic issues. The keiretsus in Japan are an interesting case study, for anyone interested.


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## young-gun (30 April 2012)

Starcraftmazter said:


> TD inflation came in at 0.3% for April (0.5% for March).
> 
> I'm really hoping it will be no more than 25bps and the banks just tell people to piss off.




i think we both know it will be a minimum 50 cut from the rba, with banks maybe passing on 20-25 points..jmo, dont forget theyre doing it tough

new home sales at decade lows too


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## jet328 (30 April 2012)

McLovin said:


> It also stops investment; why invest in that new plant today when it will be cheaper tomorrow.




You hear this line trotted out all the time but is it really true?
If productivity growth is running at 1% per year, will it really stop you from buying a bag of apples because they'll be 1% lower? Stop you from investing in a business for 1% difference a YEAR later. Heck most businesses have computers, and not only do the deflate faster than productivity growth the computers get faster as well.

Computers, flatscreens, smartphones, ipods....
We all own them, we all know they'll be better and cheaper in a year, yet they sell like hot cakes...


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## McLovin (30 April 2012)

jet328 said:


> You hear this line trotted out all the time but is it really true?
> If productivity growth is running at 1% per year, will it really stop you from buying a bag of apples because they'll be 1% lower?




A firm making a capital investment decision is not the same as someone buying a bag of apples. And yes, in a deflationary environment, where firms believe the cost of the widgets they will manufacture will fall in subsequent years, that has to be factored in to the capital budgeting decision.


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## kid hustlr (1 May 2012)

V suprised by the decision today. Looks like a bit of a panic to me, why not just steadily cut by 25 bps?


World economy is scared of delation if you ask me, they'd much be above 3% inflation than under 2


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## Timmy (1 May 2012)

kid hustlr said:


> V suprised by the decision today. Looks like a bit of a panic to me, why not just steadily cut by 25 bps?
> 
> 
> World economy is scared of delation if you ask me, they'd much be above 3% inflation than under 2



We get the full statement on May 4, so expect more detail on the 'why' then. Expect something re European probs back in the spotlight, growth in the US coming in slower etc. Low inflation here in Aust. has given them room to move.


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## joea (1 May 2012)

kid hustlr said:


> V suprised by the decision today. Looks like a bit of a panic to me, why not just steadily cut by 25 bps?
> 
> World economy is scared of delation if you ask me, they'd much be above 3% inflation than under 2




This is no suprise.! It has been mentioned prior to the cut today, that there would possibly be at least 0.75%  cut before December.
If you look at the interest rate around the world, you will see they are close to zero.
At the very least Australia has room to move.

The question now, is it too late.?

The April PMI Manufacturing Index was announced today at 43.9. That is a drop of 5.6 points.
I think if it goes below 42, we are in trouble. This is a severe contraction in our economy.
joea


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## Uncle Festivus (1 May 2012)

It must be worse than I thought? Are they joking or are we heading for GFC II?


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## skc (1 May 2012)

Uncle Festivus said:


> It must be worse than I thought? Are they joking or are we heading for GFC II?




May be the RBA thinks only half will get passed on anyway so to get a 25bps impact on the economy they'd need a headline cut of 50bps.

But if they think that's going to save retail, manufacturering or house prices, they are being optimistic imho.


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## notting (1 May 2012)

skc said:


> May be the RBA thinks only half will get passed on anyway so to get a 25bps impact on the economy they'd need a headline cut of 50bps.




That would be the thinking!



skc said:


> But if they think that's going to save retail, manufacturering or house prices, they are being optimistic imho.




Good thinking too.


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## kid hustlr (1 May 2012)

It just gives a strange message if you ask me. Whenever people think of rate cuts more than 25 bps they think GFC.

It wouldn't surprise me if declining house prices were a major reason for the severe cut.


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## McLovin (1 May 2012)

skc said:


> But if they think that's going to save retail, manufacturering or house prices, they are being optimistic imho.




Indeed. Kochie, Greenwood, Margie Osmond, they'll all be out tonight telling everyone how great it is. It's like driving a car with flat tyres, even though you're pushing the accelerator down to the firewall, the thing just won't go.

The funny thing is, if economists got out of their CBD offices and went and spoke to small business owners they would have known that the economy has been in the toilet for 18-24 months. Sometimes staring at statistics won't tell you everything.


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## joea (1 May 2012)

I think the RBA is too late for manufacturing, because of the punishment from the high $A.
I now expect some parts of Australia to fall into recession.

I see Wayne Swan has taken credit for the rate cut.
My logic then says he must be responsible for the economic slump in Australia as well.

I think he won his economics degree "in a raffle"!

joea


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## Julia (1 May 2012)

Timmy said:


> We get the full statement on May 4, so expect more detail on the 'why' then. Expect something re European probs back in the spotlight, growth in the US coming in slower etc. Low inflation here in Aust. has given them room to move.



Let's hope the statement on 4 May does something to dispel Swannie's insistence that the rate cut is entirely due to his magnificent fiscal management.



joea said:


> This is no suprise.! It has been mentioned prior to the cut today, that there would possibly be at least 0.75%  cut before December.
> If you look at the interest rate around the world, you will see they are close to zero.
> At the very least Australia has room to move.



You can't compare the Australian situation with that of the countries with the ultra low interest rates, so it's not really relevant is it?



skc said:


> May be the RBA thinks only half will get passed on anyway so to get a 25bps impact on the economy they'd need a headline cut of 50bps.
> 
> But if they think that's going to save retail, manufacturering or house prices, they are being optimistic imho.



Yep, agree on both points.



joea said:


> I see Wayne Swan has taken credit for the rate cut.
> My logic then says he must be responsible for the economic slump in Australia as well.
> 
> I think he won his economics degree "in a raffle"!
> ...



I felt quite ill watching him on "7.30" this evening.
Could add to your comments above but in the interests of not using bad language on ASF, I'll refrain.


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## Knobby22 (1 May 2012)

I remember the Coalition slogan that you will always get lower interest rates under them.

A pretty low point that helped them lose the election and one that is being disproved at present.

It's all about liquidity and confidence, both seem to be dropping quite quickly at present.
With the Fed budget sucking more liquidity we could be in for some more rate cuts.

Might get interesting.


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## young-gun (2 May 2012)

Uncle Festivus said:


> It must be worse than I thought? Are they joking or are we heading for GFC II?




the world never left the first one?


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## Uncle Festivus (2 May 2012)

young-gun said:


> the world never left the first one?




I think we are only just now hitting the stimulis bubble highs globally, so unless they keep printing then something has to give?

Apparently the RBA believes HSBC's China figures over the official Chinese manufacturing data - HSBC shows already in contraction while the official data shows expansion???

Jim Chanos - 'Chinas' banks are built on quicksand'

Looks like a call to CBA or St George today to see who still has the best at call online account rate........

Must......not......let.....property....prices.....fall....to...realistic....values........?


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## joea (2 May 2012)

Knobby22 said:


> I remember the Coalition slogan that you will always get lower interest rates under them.
> 
> A pretty low point that helped them lose the election and one that is being disproved at present.




No doubt they would like to re-phase that statement.!!
It is interesting that they lost the election, with money in the bank and the economy in not bad shape. The pendulum has now swung to enormous debt, and rate decreases to help pull the economy out of a dive.

Why has the current Government been over optimistic with the future economic figures?
They have basically spent the money, they THOUGHT they were going to accumulate.

I think it has something to do with the following::
http://www.theaustralian.com.au/bus...-per-cent-growth/story-e6frg9qo-1226344106993

So if Gillard goes, will Wayne Swan remain as treasurer.?

Yes interesting times ahead indeed.
joea


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## joea (2 May 2012)

Julia said:


> You can't compare the Australian situation with that of the countries with the ultra low interest rates, so it's not really relevant is it?




I will have to explain a little better.
I was not comparing Australia interest rates with other countries, I was commenting on how they moved on their rate decrease much quicker than Australia.

To confirm this, we may see Stevens admit they have not correctly estimated the current state of the Australian economy.(or maybe he has.)

joea


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## moXJO (2 May 2012)

joea said:


> I will have to explain a little better.
> I was not comparing Australia interest rates with other countries, I was commenting on how they moved on their rate decrease much quicker than Australia.
> 
> To confirm this, we may see Stevens admit they have not correctly estimated the current state of the Australian economy.(or maybe he has.)
> ...




Given the amount of stimulus that flowed through I think they were close to getting it right. We still have room to play with interest rates while other countries are up the creek. 
If we do get constant deflation I dread to wonder how badly current locked in wage costs will affect business which in turn spirals into job losses.


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## joea (2 May 2012)

moXJO said:


> Given the amount of stimulus that flowed through I think they were close to getting it right. We still have room to play with interest rates while other countries are up the creek.
> If we do get constant deflation I dread to wonder how badly current locked in wage costs will affect business which in turn spirals into job losses.




Yes we still have room to move. But wonder why we were not lower before Christmas with still 3.5% to play with. I just get this strange feeling the cuts are not producing the desired relief.
Job losses. A mine went into administration this week, 325 jobs gone and 200 contractors put off.(zinc price).

As for stimulation and the rest of Labor taxes, I do not believe we got "bang for our buck".
On the face of it, they are playing today with tomorrows money.
Better off  looking after our "back paddock", than sprouting to the rest of the world how good our economy is.
Will be interesting to see what the banks do. Individually or as a group.
joea


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## young-gun (2 May 2012)

Uncle Festivus said:


> I think we are only just now hitting the stimulis bubble highs globally, so unless they keep printing then something has to give?
> 
> Apparently the RBA believes HSBC's China figures over the official Chinese manufacturing data - HSBC shows already in contraction while the official data shows expansion???
> 
> ...




i agree the stimulus is currently in full force. when you pump 1 trill into an economy like the US it doesnt stay local, it filters throughout the global economy. as is all stimulus.

whoever sat down and thought that creating a stimulus bubble on top of an already enormous(biggest in history) debt bubble should be removed from any position that allows them to make such decisions(so basically everyone involved).

ive heard china are quite good at manipulating figures? 

will be interesting in the next day or so to see which banks pass on how much of the cut. would be amusing if they passed on none at all. 

i think its become quite evident in the states and other nations that low interest rates dont save housing


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## young-gun (2 May 2012)

joea said:


> As for stimulation and the rest of Labor taxes, I do not believe we got "bang for our buck".
> On the face of it, they are playing today with tomorrows money.
> Better off  looking after our "back paddock", than sprouting to the rest of the world how good our economy is.
> Will be interesting to see what the banks do. Individually or as a group.
> joea




is this not exactly the underlying problem with the global economy? why pay for today what you can pay for in 10 years with the miracle of debt. in fact, why even bother paying of that debt? how about we refinance with mroe debt so we dont have to pay that off.

youre absolutely right, we're just heading down the same path as everyone else. you think we would observe and learn from others mistakes. embrace the downturn and our down time will be far less in the long run.


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## Starcraftmazter (2 May 2012)

joea said:


> The question now, is it too late.?
> 
> The April PMI Manufacturing Index was announced today at 43.9. That is a drop of 5.6 points.
> I think if it goes below 42, we are in trouble. This is a severe contraction in our economy.
> joea




Rate cuts will not save manufacturing, "high" rates (which are actually quite low by historical standards) have nothing to do with why manufacturing is doing badly.



Uncle Festivus said:


> Must......not......let.....property....prices.....fall....to...realistic....values........?




I would be really very surprised if this rate cut has any significant impact on the housing market. If anything, it will panic people out of buying a house right now.

Winter is coming, RP Data no longer does seasonal adjustments, I predict carnage.


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## joea (3 May 2012)

Starcraftmazter said:


> Rate cuts will not save manufacturing, "high" rates (which are actually quite low by historical standards) have nothing to do with why manufacturing is doing badly.




Well I am aware of that! But it appears the economic "experts" in Labor are not!
They appear to think a rate cut solves all problems.(the campaigning they have done)
No mention of the $A.

These experts see a rate cut, or "throwing millions at it", solves the problem.
Or we could  suggest that Labor is holding back manufacturing, to balance the mining boom.

$A comments from RTT.

http://www.readtheticker.com/Pages/...orites-are-about-to-leaving-the-party-2012-05

"expert".... x == unknown quantity.  pert== drip under pressure.

Tony Shepherd from business council of Australia suggest that Wayne Swan will solve all our problems with his budget next week, and it will all be achievable. He must have had a sneek preview. Or maybe he has just come back from the moon.
I did not know Richard Branson has his space flights operating yet.

joea


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## joea (5 May 2012)

Well it now seems the RBA are working with stale data.

I think its a strange world we live in, when $30 million can be wasted on fuel watch, and the economic data to the RBA is not up to date.

http://www.smh.com.au/business/rba-hurt-by-lack-of-funds-20120504-1y4g0.html

One would think that many Australians has lost money because of an incorrect call on rates. (rate decision after election 2007 I think, when it was increased, then a number of decreases.)
I just don't get it any more!!
joea


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