By Richard Rittorno
Australia highlighted to the world that — unlike other nations — they still have capacity to cut interest rates to shield their economy after the Reserve Bank of Australia (RBA) cut the cash rate 25 basis points to 4.25% from 4.5% last night.
The move surely caused envy around the globe but the RBA’s ability to cut rates is not cut and dry as they juggle a two-tier economy.
Australia’s resources in basic materials, such as gold, copper and oil has driven up the value of the Aussie dollar, leaving other sectors of the economy behind. The manufacturing, retail and tourism businesses are having a difficult time competing with lower-cost options being provided by the rest of the world.
And they badly need the rate cut. the Council of Small Businesses of Australia is now reporting the number of small businesses that are insolvent has increased by 80%.
Australia’s housing market is starting to falter, with prices falling 4% in the 10 months to the end of October on a seasonally adjusted basis, according to RP Data.
Currency markets have expecting this rate cut for some time, but the Aussie dollar (NYSE:FXA) barely budged against the U.S. dollar.
This is causing concern for the manufacturing, retail and tourism sector if the Aussie dollar continues to remain strong it could cause further weakness if the Aussie remains around parity against the U.S. dollar.
To add salt to the wound, Australia’s largest trading partner, China, is expected to slow down in 2012. China’s gross domestic product growth could slip to around 8% from more than 9% this year that will lead to lower demand for commodities putting further pressure on Australia’s overall growth.
China, along with the euro zone slowdown, will help devalue the Aussie dollar, but such global weakness would threaten the strongest sector in the Australian economy in the process.
Traders and the RBA will be looking for a clear picture to be painted with the crisis in Europe and possible signs of a China slowdown when Central Bank meets again in February.