A Dilemma—What is the Reserve Bank to Do?

At the start of this month the Reserve Bank of Australia reduced the wholesale cost of money by 25 basis points. They really did not want to do this for fear of it pushing up house prices which would be bad for the economy; but they took the chance in the hope that a quarter of a percentage point drop would get people out spending at the shops but was not enough to impact house prices.

The early data indicates—this drop was less then two weeks ago—that this small reduction in interest has not had the desired affect. People are still not rushing out and buying more stuff. Retailers are still bleeding.

So … what will they do on the 6th of December? Will they go for another reduction of 25 basis points to try and boost up Christmas spending—so badly needed by the retailers; or will they consider it just too risky in relation to house prices?

The Reserve Bank needs house prices to remain flat for three to five years so that wages can catch up a bit. A further reduction in the cost of money, no matter now small, may cause house prices to start to curve up.

If you read the various articles (which reminds me I have not bought Saturday’s Financial Review yet or picked up a Sunday Times) it seems the ‘experts’ are split down the middle on what the Reserve should do. One side saying that they have to take the chance and drop the cost of money another 25 basis points in order to give the retail industry a shot in the arm. The other side argues the dire longer term impact of house prices starting to go back up.

What a problem …

Then you have to factor in: falling commodity prices (iron ore falling almost 40 percent in two months); the devastated tourism industry; the knock-on effects of the financial issues in Europe; the possibly of economic fall-out from the problems in Libya, Syria, and Iran; the manufacturing downturn and almost 9+ percent unemployment in the USA; and the ‘real’ impact of the new carbon tax on household budgets.