Problems in the Eurozone show no signs of easing, while in Australia, industry forecasters predict several more rate cuts in 2012
THE EUROPEAN Central Bank’s December announcement that 523 European banks will receive €489 billion worth of cheap three-year loans under the Bank’s long-term refinancing operations proves, according to AMP’s chief economist, Shane Oliver, that the Bank is willing to act as a lender of last resort.
The unprecedented ‘liquidity operation’ should reduce the risk of a bank collapse.
The Reserve Bank of Australia’s (RBA’s) December cash rate cut was driven largely by the problems in Europe and the RBA will definitely take its
European counterpart’s move into consideration at the next RBA Board meeting in February.
“Developments in Europe continued to pose downside risks to the global economy,” the minutes of the Board’s December meeting read.
“These risks had increased, though the timing and magnitude of any effects that might flow from them remained very difficult to predict.”
It is more than reasonable to assume Europe’s problems will continue to influence Board decisions. However, developments in Asia will also play a role, as will the level of consumer confidence.
“The history of previous easing cycles shows that rate cuts do not guarantee an improvement in sentiment,” says Westpac’s chief economist, Bill Evans.
“Since 1994, we have seen 20 rate cuts including December 2011’s. On 12 occasions the [Westpac Melbourne Institute Consumer Confidence]
Index has increased following the rate cut, and on eight occasions it has fallen.
“The likely explanation is that survey respondents’ concerns over the reasons behind the rate cut may overwhelm the perceived benefits of the cut itself.
“For [a recent] survey we asked respondents questions about the news items which they most recall and whether those items are perceived positively or negatively.
“For this survey, news on interest rates was recalled by 31.5 per cent of respondents whereas economic conditions attracted the attention of 60 per cent; international conditions, 55.6 per cent; and Budget and taxation, 36.9 per cent.
“The news on economic conditions, international conditions and Budget and taxation was considered the most negative since 2008/2009. News on interest rates was the most positive since that period.”
Despite the positive perception of interest rates, however, the confidence of respondents with a mortgage fell by 9.5 per cent, Mr Evans says.
An increase in unemployment and the constant stream of news of developments in Europe is likely to have impacted respondents, he explains, adding that with sentiment falling, it is now very likely that the Reserve Bank will cut rates several times in 2012.
Hopefully, this will not only boost consumer confidence but will also kick start a still extremely sluggish property market.
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