The RBA's European insurance

Well now we know the result, a 25 basis points to 4.25 percent, but I do not think this is the result (25 basis points hold or cut) would have really been a surprise.

Press release of the RBA, it is clear that the cut was in response to events in Europe. Central Bank notes that "Financial markets have experienced considerable turbulence, and financing conditions have become much more difficult, especially in Europe.

"This, combined with precautionary behavior by firms and households, means that the probability of another material slowdown in global growth has increased."

Noting the decline in commodity prices, the difficulty of Australian financial institutions to obtain long-term financing, credit growth and a moderate decline in asset prices, the RBA pulled the trigger.

It seems like another cup of insurance if, rather than a response to a real deterioration in domestic conditions. Indeed, the opinion of the Board of the Australian economy has changed little. So only the internal state of play, they probably would not cut.

"Information on the Australian economy suggests that output growth was close to trend, with growth in demand more than that," the press release read.

Private demand, we know from partial data, looks set to be quite strong in the third quarter, with households and businesses started to make a decent and just about the only contribution to growth on the expenditure side. There is therefore no need to be stimulated further here. That the Board RBA is worried about is the impact of Europe and the turmoil of tighter financial conditions will have on this point.

We get more cuts will depend entirely on Europe then, but unfortunately we can only look at the events taking place - not to mention the summit on Friday and the ECB is widely expected to do "something" after changes to the treaties are agreed. As for the national data stream, it begins to slow down for Christmas. Realistically, it will not be until February mid-January/early we have a good idea as to how the national economy is traveling against this. So far, so good, but what happens, growth will remain solid less likely.

The market currently expects a cash rate of around 3 percent in the middle of next year. I suspect that we will achieve this if Europe does not implode. Otherwise, we could see some corrective hikes. It is my hope now, but it is based on Europe itself, sorting, or at least stabilize. We shall see. If they can not or do not, well we achieve these reductions.

Article Source:- http://www.businessspectator.com.au/bs.nsf/Article/RBA-board-meeting-interest-rates-cash-rate-cut-red-pd20111206-PA6ZR?OpenDocument

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