Jul 24, 2008

Fallow On The Cut

Brian Fallow analyses the Reserve Bank's surprise interest rate cut

In a 'What the hell, why wait?' decision Reserve Bank governor Alan Bollard has cut the official cash rate, for the first time in more than five years.
With two monsters on the rampage, recession and inflation, his money is on the former to deal to the latter.
He is betting, in short, that much as they might want to people will struggle to pass on the higher costs they face to their employers or their customers.
But he expects inflation to get worse before it gets better, rising to 5 per cent in the September quarter (an increase from the 4.7 per cent the bank was forecasting only six weeks ago).
Bollard implicitly acknowledges that the Reserve Bank's official cash rate decisions are only one factor affecting the interest rates borrowers in the mortgage belt or in business face.
"The cost of funds raised abroad by banks has been rising as the international financial situation has deteriorated," he said.