China slash interest rates
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In response to a slowing economy the People’s Bank of China have taken the dramatic step of cutting their interest rate by 108 basis points in an attempt to stimulate demand within the economy.
The rate cut is the biggest by the Chinese since 1997 when the People’s Bank of China cut rates by 144 basis points.
The rate cut has reduced the one year yuan lending rate to 5.58%.
The rate cuts in China are likely to be followed by the Reserve Bank of Australia next week as they attempt to stimulate domestic demand within Australia.
Rates forecast to hit near 50 years low in April 2009
Latest forecasts are expecting the Reserve Bank cash rate to hit 2.75% by Easter 2009 as the global slowdown continues to bite the economy.
Debt futures markets are forecasting a cash rate of 2.75%, a decrease of 2.5% from current Reserve Bank levels.
THe last time the cash rate was this low was 1960 when the cash rate hit 2.9%. Debt markets have also upped the expectation of a rate cut to 1.25% in December.
The expected falling interest rates are on the minds of major central bankers around the world as the global economies have or are falling into recession. The powerhouse German economy and Europe announced they were in recession last week and are hot on the heels of the faltering UK and US economies.
United States & British Inflation plummets
In latest reports from Britain and the US, inflation has plummeted in both economies amid worsening economic conditions that have dragged thw world economy into an impending global recession.
In the US inflation fell at the fastest rate in 61 years in October as consumers have stopped spending and retailers attempt valiantly to maintain demand. Consumer prices dropped by 1% as fuel prices alone dropped by 14.2% in October.
In Britain, the annual inflation rate in October fell to 4.5% from 5.2% in September, the first fall in 14 months. The fall is the biggest monthly fall in 16 years as the global economy falters.
The news from the US and Britain confirm the respective central banks views that inflation would fall and locks in bigger than expected rate cuts on the way.
RBA Minutes of Monetary Policy for November 2008
The Reserve Bank of Australia released it’s minutes from it’s monetary policy meeting on 4 November 2008 today.
These minutes always make for interesting reading but even more so at a time when the economic environment is as dire as it is today.
Click on RBA to read the minutes from the Melbourne Cup day meeting when interest rates were cut.
Australian interbank lending crisis eases
Australian interbank lending rates have fallen faster than those same rates overseas in recent weeks as interbank lending rate have moderated considerably in Australia.
The rate between the three month bank bill swap rate and the overnight index swap dropped to 32 basis points from 45 basis points last week. This is down from 140 basis points at the peak of the credit crisis in October and directly reflects the cost of interbank lending.
In the US the equilivant rate has fallen from 3.60% to 1.70% at the end of last week. A considerable drop from the peak but it also reflects the fear that is still evident in the US.
Japan join Europe in recession
Japan announced today they had entered recession after seeing a contraction in the economy for the second quarter in a row.
Japan’s gross domestic product contracted by 0.1% between July and September as the second biggest economy slowed amid the global financial crisis.
Only last week Europe announced they had fallen into recession after the powerhouse German economy was announced in recession a day prior.
RBA look to another 1% cut in December
The RBA will almost certainly cut rates again by 100 basis points or more after economic data from Australia and around the world is pointing to a global recession.
Last night Europe announced that the 15 countries that make up the Eurozone has fallen into recession amid worsening economic conditions.
A day earlier the economic powerhouse of Germany announced they had fallen into recession amid the global crisis of confidence affecting markets.
The fear of ongoing job cuts around the world driven by corporate cutbacks is now widespread with acute pain being visable throughout Europe and the US. The fear and panic their has spread to other regions and Australia may be heading down the same path.
Australian markets have been savaged over the last six months and consumers have stopped spending hoarding available cash in case of job cuts or harder economic times ahead.
This fear will force the RBA into another major rates cut in December that could see 100 basis points cut from the official rate to 4.25%. More cuts will follow next year as the economy is expected to experience a very tough 2009 amid corporate job cuts and record low consumer confidence.
How big do you the December rate cut will be? Add your comment today.
NAB Business Survey reveals business confidence at record lows
Australian business confidence continued to fall in October as fears of a growing global recession impacted heavily upon the outlook of the domestic economy.
The monthly National Austalia Bank business survey revealed that confidence fell 21 points to minus 29, the lowest level since the survey began in 1997.
The survey which showed a fall in confidence across all major sectors indicates that falls on stockmarkets and the prevailing negativity in the press regarding the global economy have finally taken their toll on business confidence.
NAB indicated their expectation that the Reserve Bank wil cut rates by another 75 basis points in December and a further 75 basis point cut in the first three months of 2009. This would take the RBA cash rate to 3.75%.
RBA cut growth forecast to 1.5%
The RBA today announced a cut to the growth forecast to the end of December of 1.5%, this is down from the IMF forecast of 1.8% and the 2% forecast only in August.
The RBA announcement was in the November Statement of Monetary Policy. The RBA also forecast a drop in the inflation rate to 3% by the middle of next year.
It would seem the RBA statement further vindicates future cuts to the RBA rate. The interbank futures are already factoring in a forecast RBA rate of around 4% and various investment bankers expect the RBA rate to fall to 4% by the middle of next year.
Central Bank Comparison
With the overnight cuts by the European and UK Central Banks I thought it apt to take a closer look at a comparison of some of the major Central Banks/Reserve Banks in the world.
| Central Bank | Rate |
| US Federal Reserve | 1.00% |
| UK Central Bank | 3.00% |
| European Central Bank | 3.25% |
| Bank of Japan | 0.50% |
| Swiss National Bank | 2.00% |
| Australian Reserve Bank | 5.25% |
| Reserve Bank of New Zealand | 6.50% |
The table above clearly shows how low interest rates have fallen since the global financial crisis began. It also highlights how high the New Zealand and Australian Reserve Bank rates are comparable to other central bank interest rates.
It would be fair to suggest that we are likely to see the European and UK Central Banks lower towards 2% and the Australian and New Zealand Reserve Banks may need to lower to around 4% or less to stimulate the domestic economy.
How low do you think the central banks of the world will lower rates? Share your thoughts in our comments section.