The Reserve Bank minutes for its June board meeting shows that the decision to trim official rates by 25 basis points was finely balanced decision and how concerned the board members were about events offshore.
In fact that’s the expression – ‘’finely balanced’’ – that the board used to describe the arguments for and against a rate cut.
The board members weren’t concerned about domestic conditions, with domestic data not suggesting any significant wakening in conditions. They were, however, worried about the significant increase in uncertainty in Europe, the softening in global economic activity it was producing and the further risk-aversion it would generate in Australia and offshore.
From the minutes it is possible to come to a conclusion that if Europe stabilises the RBA will feel little pressure to cut rates further. That inclination to sit on its hands would have been reinforced by the recent surprisingly robust GDP and jobs numbers.
That is, however, a big ‘’if.’’
The outcome of the re-run of the elections in Greece, where the pro-bailout/austerity parties emerged with a majority, might have been expected to defuse the building tensions in Europe. Certainly a victory for the anti-austerity forces could have ignited chaos.
Any relief the markets felt, however, was very short-lived. The Greeks have bought themselves a bit of time, but even the pro-bailout parties want less austerity and the strength of the showing by the radical socialists underscores the continuing potential for social upheaval if the rest of the eurozone isn’t prepared to concede something substantial.
Worse, even as the election result was being broadcast the markets were focusing on a much bigger target, Spain, with the yields on its 10-year sovereign debt spiking above seven per cent despite a proposed $US125 billion bail-out of its banking system. Yields on Italy’s bonds are also on the move again.
Meanwhile, in Mexico, the G-20 leaders were urging the Europeans to do whatever it takes to defuse the eurozone crisis, including more growth-oriented policies – and being told by the Europeans to butt out and stop lecturing them on how to manage their affairs.
European Commission president Jose Barroso and European Council president Herman Van Rompuy are urging the rest of the world, and markets in particular, to focus on a scheduled European Union summit at the end of the month where they expected the EU to move closer to political and economic integration. Unfortunately, however, they are also warning not to expect early action.
‘’I can assure you that even if we in June will not take definitive decisions, the path, the trajectory is very clear for everybody. In this case the pace is less important than the decision we make,’’ Van Rompuy said.
Having watched the eurozone plunge into an ever-deepening and increasingly insoluble crisis over the past 12 months, all the while trying to buy time and continue kicking cans down the road, the rest of the world won’t take much comfort from that.
While in this economy the effects of the carbon tax and the contractionary effects of the May budget are yet to be felt, the 75 basis points of back-to-back reductions in official rates, most of which were passed on by the banks, will to some extent act as a counter-veiling force. The boom in resources investment and the spill-over effects for the wider economy is continuing despite China’s slowdown.
With the RBA’s cash rate having helped push average mortgage rates down to about 40 basis points below their long-term average, it would appear from the minutes that barring some shock domestic economic development, the RBA sees the last cut as pre-emptive and as insurance against external threat.
Unless that threat materialises – and given the inability of the Europeans to get their act together and come up with some kind of holistic approach to stabilising the eurozone, one can’t discount the continuing risk of an implosion in Europe that sends destabilising shock waves through global markets and economies – the minutes suggest that one wouldn’t bet on another rate cut anytime soon.