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Australian Federal Reserve leaves rate at 6.25% , February 2007

Posted by Adrian on February 8, 2007

As predicated by majority of economists, the Australian Reserve Bank left the cash rate unchanged at 6.25, after their meeting on Tuesday 6 of February. Although a predicated decision, due to lower CPI contributed from (apparently) lower retail spending in late 2006, the question is; Was this a right decision? Within Australian economists, you don’t find many dissenters. We just hope that the RBA is keeping check on inflation and price volatility. We also hope and pray (if you are religious) that the RBA doesn’t copy the US Federal Reserve in an overall biased view against a tighter monetary policy.So, was this a right decision? In my opinion, no. Yes, a breather for the overstretched mortgage market. But in the long run, a short sighted view that the Australian economy is cooling. Which it isn’t, you just have to see prices for your self. Do you see a decrease in costs at the supermarket? Rents (definitely not, which is just driven by greed)? Fuel? General goods? The answer is no? If I buy a $7.50 falafel, that essentially is a cheap food (non meat), and his competitor is offering a $7.25 (with extra homus) – I am not seeing much decline in a price. But it’s obvious, what we earn after tax doesn’t have the purchasing power that it should. In other words, prices are still spiraling upward. Demograpia just recently released a report stating that Australia is the least affordable nation (property) surveyed with Ireland , New Zealand, Canada and America. Australia has an overinflated property market and it could be in for a big correction. The RBA should have tightened, with more of a future view; rather than CPI results prior to the decision, that came in from last years retail spending.

There has yet to be a decline in the Australian housing market as compared with the American one, which has been gradual, to the point of now a sharp decline. Australia may just be a sharp decline. Was the RBA correct in trying allow a slow decreases in the economy? Or should they have gauged the spiraling overpriced rental market and the high costs of food, and no significant price decrease in petrol? They should have been brave and attempted to tighten now, it just means they may do it later – which of course confuses the consumer.

Article regarding Demograhia housing affordability report – The Australian

2007 Demagraphia property affordability report here pdf format

I love this quote,

” ANZ economist Amber Rabinov said the data was consistent with the bank’s expectation that higher rates would lead to more cautious spending by households and moderate growth in non-farm activity. “This is further evidence that the RBA has done enough to contain domestic demand and inflationary pressures in the Australian economy,” she said..

What a programmed response. Yet the share market rallied, and household debt is still extraordinarily high – there are no real signs that consumption is slowing.

Article here


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