Australia and New Zealand - Weekly Prospects 8/12/08
• The RBA last week announced another huge reduction to the cash rate target. This time, the cut was a punchy 100bp,
taking the cumulative RBA easing since early September to a colossal 300bp. This is the most aggressive series of
official rate cuts since the painful 1990-91 recession - there is a clear message there! Indeed, we believe the rate
cuts have come too late to keep the economy out of recession—GDP growth was barely positive in 3Q, before the onset of
the worst of the financial crisis. GDP probably will fall in the current quarter, and in 1Q 2009. The week ahead sees a
speech by the RBA Governor, and the release of the latest business and consumer confidence readings and the November
employment data. Employment probably fell in November, while both confidence measures should rise, albeit modestly. The
RBA Governor is speaking of "interesting times", which could make it a long night!
• The RBNZ cut the cash rate 150bp to 5% last Thursday, in line with expectations, taking monetary policy to an
"expansionary" position. The OCR now has fallen 325bp since July. RBNZ Governor Alan Bollard said that "ongoing
financial market turmoil and the marked deterioration in the outlook for global growth" played a large role in shaping
the decision. Still, the RBNZ is wary that domestically generated inflation remains elevated. The Bank is confident,
though, that annual inflation will return comfortably to the target band of 1-3% in 2H09. Indeed, pipeline pressures and
inflation expectations have started to ease. Retail sales numbers are scheduled for release on Friday—sales should
have been flat in October.
• The US economy has now officially been judged to be in recession since the start of the year. For its part, the global
economy likely slipped into recession around the middle of the year. However, the performance of the global economy
since the financial crisis intensified in September is a dramatic break from what came earlier. The past three months of
data releases have revealed an unrelenting descent into a deep global contraction. As a result, many business surveys
now stand at thirty-year lows. US consumers appear to be in the midst of a downward spasm, as spending on durable goods
as a share of GDP has slipped to a historic low. And over the past three months, the US labour market has shed an
average of 419,000 jobs per month. There is no longer any doubt that the US economy is in the midst of the deepest
industrial world downturn of the post WWII era.
• Developments last week pointed to a rapid convergence in policy rates to unprecedented low levels. The ECB, BoE, and
Riksbank each cut sharply, extending the dramatic moves seen over the past two months. And they have signaled that more
moves are in the offing. With these actions and the Fed expected to implement ZIRP by early next year, all of the major
central banks are expected to have policy rates of 1% or lower by the end of 1Q09.