aust interest rates cut, page-33

Miningnut,

Whilst a cut in rates tomorrow would remove the differential existing between ECB and US rates vis-a-vis our own, they would also spell potential disaster for the local economy.

The only reason to lower rates at this time would be to factor in for:
1)
external shocks (not likely given the quality of recent US economic data, and the improving Euro data);
2)
internal implosion (not lilely given that local economic sentiment is still relatively robust in most areas except for the rural sector - drought and FX influenced); or
3)
domestic fear (ie: due to another episode of terrorism - quite possible, but the RBA will only ever react to such a scenario, never anticpate it).

Reducing rates would, therefore, send a dampening signal to the economy in respect of something which is currently not there. In my view, a cut in rates would quickly translate to a loss of confidence in the economy. In other words, an outcome opposite to the effect desired would be achieved as a result.

Reducing rates may well add further fuel to the ongoing property boom, but rising prices (due to labour, and input shortages) will remain in vogue, and the Banks will continue to tighten up on their lending criteria. In other words, those seeking to borrow at the margin will be forced to seek out the NBFI's (outside of the mainstream banking system) and for these people, a cut in rates tomorrow will only manifest themselves into higher rates at the lending counter. Why? Because of the added in risk weighted premium. amongst other things.

Any rally in the market due to the RBA cutting rates will, therefore, be very short lived.

As for TMS, well - everyone has one.