"[Here is an interesting article that explains the effect on consumer spending of government fiscal policy and central bank monetary policy to stimulate the economy in the face of a looming recession:] We were surprised to see that underlying inflation increased in the September quarter. With the March quarter printing 1.2 per cent and the June quarter printing 1.1 per cent we expected that the slowdown in the economy, which has been very clear through 2008, would have caused some further modest moderation in the underlying measure in the September quarter. In the event underlying inflation actually increased to 1.2 per cent from 1.1 per cent in June. That would have unnerved the Reserve Bank although it is reasonable to assess that inflation responds to slowing demand with a longer lag than the six months that may have been expected. The Governor's speech on Tuesday set out the Reserve Bank's position that inflation would fall in 2009, so until the first print of 2009 inflation was available (April 22) the Bank would be 'free' to focus on policies to avert the recession rather than targeting inflation. That plan coincides with our own view of the policy schedule. We think the Bank will aim to bring rates marginally into the expansionary zone by the first quarter of 2009. The stance of policy will be determined by the level of the variable mortgage rate rather than the cash rate. With the banks having tightened mortgage rates by 50 basis points more than the net tightening of the RBA over the last two years the 'neutral' RBA rate will be 50 basis points less than previous assessments. We would assess the 'old' neutral at 5.5 per cent with the new neutral at 5 per cent. A target of 50 basis points below that 'new' neutral 4.5 per cent seems reasonable. That would imply two 50 basis point cuts in November and December to be followed by two 25's in February and March next year. We believe this will be the 'best' policy and is not inconsistent with the previous two easing cycles in 1996/97 (250 basis points to 5 per cent over 12 months) and 2001 (200 basis points over 10 months to 4.25 per cent). Due to the greater urgency of the global credit crisis, this easing cycle should be more rapid. The 275 basis points would be achieved in a seven month period from September to March. Markets are currently pricing in a 50 basis point cut on November 4 (yes, Melbourne Cup Day) when a large part of the market (Melbourne) has public holiday and the Sydney crowd has traditionally been in party mode. We expect the Bank will have to alter this arrangement next year because limited liquidity will risk an unanticipated market response to any 'surprise'. That 50 basis point cut, which is our view, has come back from the 75-100 basis point that had been priced in until last Friday. The risk is that the market takes even more out of the near term outlook. Since the last 100 basis point cut, when the market priced in that 75-100 basis point follow up, we have seen a number of relatively hawkish events. These include the government's $10.4 billion fiscal packag
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[ Money / Invest ] - ID: 30119
"[Here is an interesting article that explains the effect on consumer spending of government fiscal policy and central bank monetary policy to stimulate the economy in the face of a looming recession:] We were surprised to see that underlying inflation increased in the September quarter. With the March quarter printing 1.2 per cent and the June quarter printing 1.1 per cent we expected that the slowdown in the economy, which has been very clear through 2008, would have caused some further modest moderation in the underlying measure in the September quarter. In the event underlying inflation actually increased to 1.2 per cent from 1.1 per cent in June. That would have unnerved the Reserve Bank although it is reasonable to assess that inflation responds to slowing demand with a longer lag than the six months that may have been expected. The Governor's speech on Tuesday set out the Reserve Bank's position that inflation would fall in 2009, so until the first print of 2009 inflation was available (April 22) the Bank would be 'free' to focus on policies to avert the recession rather than targeting inflation. That plan coincides with our own view of the policy schedule. We think the Bank will aim to bring rates marginally into the expansionary zone by the first quarter of 2009. The stance of policy will be determined by the level of the variable mortgage rate rather than the cash rate. With the banks having tightened mortgage rates by 50 basis points more than the net tightening of the RBA over the last two years the 'neutral' RBA rate will be 50 basis points less than previous assessments. We would assess the 'old' neutral at 5.5 per cent with the new neutral at 5 per cent. A target of 50 basis points below that 'new' neutral 4.5 per cent seems reasonable. That would imply two 50 basis point cuts in November and December to be followed by two 25's in February and March next year. We believe this will be the 'best' policy and is not inconsistent with the previous two easing cycles in 1996/97 (250 basis points to 5 per cent over 12 months) and 2001 (200 basis points over 10 months to 4.25 per cent). Due to the greater urgency of the global credit crisis, this easing cycle should be more rapid. The 275 basis points would be achieved in a seven month period from September to March. Markets are currently pricing in a 50 basis point cut on November 4 (yes, Melbourne Cup Day) when a large part of the market (Melbourne) has public holiday and the Sydney crowd has traditionally been in party mode. We expect the Bank will have to alter this arrangement next year because limited liquidity will risk an unanticipated market response to any 'surprise'. That 50 basis point cut, which is our view, has come back from the 75-100 basis point that had been priced in until last Friday. The risk is that the market takes even more out of the near term outlook. Since the last 100 basis point cut, when the market priced in that 75-100 basis point follow up, we have seen a number of relatively hawkish events. These include the government's $10.4 billion fiscal packag&theme=ont class=sampleQuote>[ Money / Invest ] - ID: 30119
"[Here is an interesting article that explains the effect on consumer spending of government fiscal policy and central bank monetary policy to stimulate the economy in the face of a looming recession:] We were surprised to see that underlying inflation increased in the September quarter. With the March quarter printing 1.2 per cent and the June quarter printing 1.1 per cent we expected that the slowdown in the economy, which has been very clear through 2008, would have caused some further modest moderation in the underlying measure in the September quarter. In the event underlying inflation actually increased to 1.2 per cent from 1.1 per cent in June. That would have unnerved the Reserve Bank although it is reasonable to assess that inflation responds to slowing demand with a longer lag than the six months that may have been expected. The Governor's speech on Tuesday set out the Reserve Bank's position that inflation would fall in 2009, so until the first print of 2009 inflation was available (April 22) the Bank would be 'free' to focus on policies to avert the recession rather than targeting inflation. That plan coincides with our own view of the policy schedule. We think the Bank will aim to bring rates marginally into the expansionary zone by the first quarter of 2009. The stance of policy will be determined by the level of the variable mortgage rate rather than the cash rate. With the banks having tightened mortgage rates by 50 basis points more than the net tightening of the RBA over the last two years the 'neutral' RBA rate will be 50 basis points less than previous assessments. We would assess the 'old' neutral at 5.5 per cent with the new neutral at 5 per cent. A target of 50 basis points below that 'new' neutral 4.5 per cent seems reasonable. That would imply two 50 basis point cuts in November and December to be followed by two 25's in February and March next year. We believe this will be the 'best' policy and is not inconsistent with the previous two easing cycles in 1996/97 (250 basis points to 5 per cent over 12 months) and 2001 (200 basis points over 10 months to 4.25 per cent). Due to the greater urgency of the global credit crisis, this easing cycle should be more rapid. The 275 basis points would be achieved in a seven month period from September to March. Markets are currently pricing in a 50 basis point cut on November 4 (yes, Melbourne Cup Day) when a large part of the market (Melbourne) has public holiday and the Sydney crowd has traditionally been in party mode. We expect the Bank will have to alter this arrangement next year because limited liquidity will risk an unanticipated market response to any 'surprise'. That 50 basis point cut, which is our view, has come back from the 75-100 basis point that had been priced in until last Friday. The risk is that the market takes even more out of the near term outlook. Since the last 100 basis point cut, when the market priced in that 75-100 basis point follow up, we have seen a number of relatively hawkish events. These include the government's $10.4 billion fiscal packag" TARGET="_top">Send as Free eCard