Australia needed a 50+ basis point interest rate cut yesterday

With all the latest turmoil surrounding the markets, and a 207.9 point loss on the ASX today. I think it’s fair enough to say that the time has come for the Reserve Bank of Australia to take some drastic action when they meet for their October Board Meeting next week. The latest market data released today indicates that building approvals fell by 3.7% for August, primarily due to the finance and global economic slowdown making it less attractive for builders to enter the market. Approvals for private sector housing fell by 0.8% while approvals for apartments and “other dwellings” were down a whopping 7.8% (check out all the data here). To be honest, I am not exactly sure what the RBA is waiting for.

The 12-month All Ords Chart shows a very bleak picture – down from 6,200 to 4,631.30 as of today. With  consumer sentiment usually always being positively correlated to the overall stock market business cycle – one would suggest the RBA is still being far too cautionary with its reaction to the global economic woes. Retail sales have continued to slow and if you take out food sales, then retail sales actually fell by 0.5 per cent for August – a shocking result.

Glenn Stevens has consistently maintained the view that the RBA needs to proactive rather than reactive in reaction to the markets and I think the time has come to fully uphold that ideology. Australia is yearning for some economic indicator which will bring some relief to the overall pressures of the global economic meltdown and the best place to start is at the cost of borrowing. The dollar is falling, investors are pushing back to raw commodities such as gold and lending is drying up hurting not only the consumers pocket at the current interest rates – but also growth and sales.

Of course, the risk in all of this is that the Big Banks are not going to pass on any associated interest rate cut in order to sooth the pain of the huge losses from the USA market collapse, and the still very high funding costs. Unfortunately, this is not something that the market can directly control – other than to pressure the Federal Government to in turn, pressure the banks to fully pass on the cut. A 50 basis point decrease in the cash rate would take it down to 6.50 per cent and provide a lot of relief to not only many families and businesses doing it tough – but also to encourage many businesses to start borrowing again and expanding.

The Official Cash Interest Rate has not been cut by 50 basis points since the aftermath of the Dot Com implosion back in April 2001. Given the current market conditions however – you would have to think the Dot Com crash was only a blip on the radar.

If you reading Mr. Stevens – do something!