Wednesday, 8 May 2013

Today's interest rate cut in Australia

Our Reserve Bank's job just got a little tougher. On a day when its fiscal stability report indicated that it has serious concerns about the potential systemic impact of lending on frothily priced housing, we hear from the ASB that its latest survey of Housing Confidence showed the highest proportion ever (63%) of respondents expecting house prices to rise, while across the Tasman the RBA has cut its cash rate from 3% to 2.75%.

As noted here earlier (see the graphs in 'The RBNZ's dilemma', April 29), easier monetary policy overseas makes the RBNZ's current problems more difficult: wider interest rate differentials, after monetary policy easings overseas, have made the NZ$ more attractive (aggravating the already overvalued NZ$), and the normal response here (a lower cash rate) is ruled out for fear of further inflating the hot housing market. No wonder our RB has been driven (as we also learned today) to trying forex market intervention to try and drive the Kiwi down by non-interest-rate means.

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