Perpetual: Should the RBA cut rates?

March 19, 2012 (PRLEAP.COM) Business News
Should there be some political pressure applied to the RBA to lower interest rates and reduce pressure on the Australian dollar?
Some political pressure has already been applied to reduce the cash rate, with the aim of lowering the Australian dollar. Fortunately, both major political parties are against this. One of the core contributing factors to Australia's 20 years without recession is the maintenance of low inflation. To abandon this target in favour of exchange rate targets (which is what the suggestion virtually is) would reverse 20 years of successful economic management and deliver very little in terms of improved economic prospects. The Australian dollar has long been viewed as a commodity currency and it remains elevated because the price of our exports is at 150 year highs (in real terms) and US interest rates are at all-time lows. Despite the Australian dollar more than doubling relative to the US over the past 12 years, our manufacturing, tourism, education and other export-based sectors have performed quite well. In the wake of our biggest mining boom in 150 years (mining investment well above trend), other sectors naturally have to grow below trend to balance the economy. To have all sectors growing strongly would reinstate the boom-bust cycle we have spent 20 years preventing.

How much is the Australian stock market looking to the Eurozone and how much is the politics driving market sentiment here?
It is clear that developments in Europe, the US and China have been driving sentiment in Australia over the past year. While Europe has stabilised and the US is looking better, the market remains at the top of its trading band. This trend has been reinforced by what can only be described as a lacklustre reporting season in February. This sort of environment has highlighted the importance of each companies' 'quality' in terms of balance sheet, earnings capacity and management. The key going forward remains income and income growth. These are the companies our portfolio managers search for on a daily basis.

What is the probability of sovereign debt contagion in Europe triggering GFC II?
It is highly uncertain how far the sovereign debt problems in Europe will go in terms of impact on financial markets. However, what is certain is that global central banks and policy makers are much better prepared than what they were in 2007. One thing that authorities underestimated in 2008 when Lehman Bros collapsed, was the degree of panic in the markets. This fear was amplified by actions of the US Congress, which voted against rescue measures recommended by the Federal Reserve Bank.

Fortunately, this episode gave us an indication of what not to do during a period of elevated stress. It's impossible to predict the degree of panic in markets, but being better prepared and knowing more than we did in 2007 should greatly reduce, but not eliminate these risks.

By Matthew Sherwood | Head of Investment Market Research

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