RBA Keeps Interest Rates on Hold as Global Economy Collapses

The RBA has left interest rates on hold today on the back of overnight global woes. Most noticably, the Statement by Glenn Stevens states (in summary) the following:

• World economy has remained very weak following decreases in demand late last year
• Conditions in global credit markets have improved since November last year, but remain fraigle
• Demand has not weakend as much as in other countries and Australia has not experienced the sort large contractions seen elsewhere.
• Inflation is likely to decline over time.
• Overally, economy is not slowing significantly and therefore no need for a cut unless some event indicates it.

Thanks Glenn – ummm just to point out that overnight the Dow Jones Industrial Average (DJI) fell around 299.64 points overnight or around 4.2%. The S&P500 (GSPC) was equally slammed falling by 34.27 points or 4.7% to around 700.82 points and the Nasdaq (NASDAQ) also shed 54.99 points or 4% to finish at 1,322.85. Most of this bad news was on the back of the announcement by American International Group (AIG) that it posted a fourth quarter loss of around a $61.66 billion USD loss or around $22.95 USD per shore – much worse than the $5.29 billion loss in the fourth quarter last year when market proponents assumed the market was at its lowest point. This meant that the full year 2008 results for AIG were a reported loss of $99.3 billion USD or a whopping $37.84 USD per share.

Iconically, this is really an unprecedented fall and has never been seen in the history of the world and to put it in perspective – Australia’s total GDP is around $1 Trillion – so this is approximately about 1/10th of our entire countries GDP loss in one organisation. Surprisingly, the RBA should have really dropped interest rates on the back of this news and other continued severe credit-market deterioration, particularly in commercial backed mortgages in the United States, but they have decided against it – perhaps to keep interest rates cuts up their sleeve for the future and to wait for more economic data.

So what is all this going to mean ?

Well, I would think that things have still some time to go yet before we hit the bottom.

There tends to be a lagging effect on numbers vs. the “real” society impact when huge losses are posted, companies take these losses in real terms and then restructure their business and retire existing staff. The global recession is having a tremendous impact on credit and this is causing serious volatility in the market as investors attempt to determine which industries are being hardest hit and which companies are the next to post huge losses. The sheer volume of money that has been lost is going to continue to hammer employment markets in addition to wage growth as companies bottom lines erode and profitability just deteriorates in line with this. 

While the RBA and the Government are attempting to keep the economy rolling along with billions of dollars of capital injections, reducing interest rates and guaranteeing deposits - I am not convinced that its going to make consumers spend. Debt is at an all time and its a fantastic time to get rid of that debt cheaply and easily. In my mind, racking up huge purchases on credit cards in ‘uncertain’ and ‘unstable’ times is really just foolish and not a prudent use of a persons income generation. Debt reduction should be the key focus for households and once the market has finally bottomed out – many individuals can turn back to the market to ride the boom upwards and capitalise on the bull run that the market will take.

For now, I would say ‘Batten down the hatches’ as more jobs and more economic announcements are going to continue. 2008 was perhaps the worst ‘unknown’ financial year in the worlds history and the effects are going to continue for some time yet. If you think about it rationally, it is just not possible to loss that much money around the world and not feel the effects for some time afterwards. Don’t fool yourself into thinking that everything is going to be fine – consolidate your finances, reduce your debt while you can or use cheap debt to capitalise on expansions to your home to improve its value in the future (when you can use the equity in your home to finance investments) and wait for the market to bottom out.