A $26 billion slide in the Australian share market, tumbling commodity prices and company profits and shrinking job vacancies have made the outcome of today’s Reserve Bank board meeting an open question.
The governor’s recommendation sent to board members Friday has been overtaken by events.
Weaker than expected news from China, India, Europe and the United States along with a 4 per cent slide in Australian first quarter profits and a 2.4 per cent fall in May job advertisements combined to push the ASX200 share index down 1.9 per cent to a six-month low of 3985 points. It was the first time the index had closed below the psychologically-important 4000 mark since November.
The market is now 41 per cent below its pre-crisis peak and down 10.2 per cent since the start of May.
The Australian dollar also slid to its lowest point for the year, closing down 0.4 of a US cent at 96.65 US cents on news of falling commodity prices and growing speculation the Reserve Bank will cut its cash rate by 0.50 rather than 0.25 points at today’s meeting. The oil price has slipped 8 per cent over the week and the copper price 3.9 per cent.
In Canberra Treasurer Wayne Swan briefed Cabinet on the weekend news describing jobs data in Europe and the United States as very disappointing.
Euro-area unemployment has hit 11 per cent, a new high for the region, and US unemployment has hit 8.2 per cent.
Mr Swan told Cabinet while European policymakers had made some progress they hadn’t done enough and it was not clear they would. The June 17 Greek elections were a potential flashpoint...
A report from financial regulators commissioned by Mr Swan showed Australian banks were well funded for at least six months ahead and could sit on sidelines for a while if funding markets deteriorated.
Australia’s economy and banks had limited direct exposure to Europe.
Chinese policymakers were well positioned to support growth and Australia’s budget surplus provided a buffer against global uncertainty and helped support Australia’s AAA credit ratings.
While the Reserve Bank took its decisions independently the budget had given it maximum flexibility to cut rates again if it chose to.
Throughout the day economists who had been predicting no cut switched to predicting a cut in the face of the run of bad news. HSBC chief economist Paul Bloxham said the global data was much weaker than had been expected and the US data was dismal. The Bank would try to stay “ahead of the game” by cutting 0.25 points.
Former Reserve Bank board member Warwich McKibbin told the Herald / Age from Washington that he thought the Bank shouldn’t cut, but only because the global situation was likely to get a lot worse and the Bank should wait and see what happened.
Stephen Koukoulas, a former economic advisor to Prime Minister Gillard ridiculed the idea of waiting until things got worse saying it was like refusing to treat a snake bite with antivenom cause there might be a second snake.
Saul Eslake of the Bank of America said he would prefer that the Bank kept its powder dry, but that if it did cut it should do 0.50 percentage points rather than 0.25 to show it was serious. If it did not cut it should be prepared to take emergency action between meetings around the time of the Greek election.
Business indicators released by the Bureau of Statistics showed company profits down 4 per cent in the March quarter and down 0.5 per cent over the year. Mining profits fell 10 per cent during the quarter. Inventories built up when goods are not sold climbed 3.4 per cent over the year. The TD Securities inflation gauge showed little evidence of price pressure with prices unchanged in may and up just 1.8 pc over the year
In today's Canberra Times, Sydney Morning Herald and Age
. A cut of 0.50 points? Again?
. The market is pricing in 2.25 per cent, within a year
. This is a slow motion train wreck - McKibbin in mid 2011