Market Update - Interest Rates and Chinese Growth

Nic Crowther
Mon 26 Oct

Are you thinking about putting on a bet for next Tuesday’s Melbourne Cup? Austrlalian Money Markets are looking keenly at a two-horse race next week with even money on an interest rate cut when the Reserve Bank meets.

Thanks to recent Federal Government policy, a rate cut on Tuesday could have minimal effect by returning interest rates to where they were - from the consumer’s point of view - two weeks ago. A cut could move the cash rate down to 1.75% (down from 7.00% at the start of the GFC) while Commonwealth Bank’s Variable home loan rate currently sits at 5.45%.



With the Treasury moving to force banks to hold on to more capital to protect Australia from another financial crisis, the Big Four have already begun passing the costs to consumers. This has been a continual frustration for the Reserve Bank, as it is running out of opportunities to force interest rates lower to stimulate the economy.

Yet again, China is causing its fair share of concern, with the Chinese Central Bank (CCB) again stepping in to stimulate the Chinese company. Concern continues to grow that the economy is not expanding at the 6-7% range that is often repeated in the media, and that the real figure is a couple of percentage points in. This makes sense given the CCB has repeatedly stated that growth of 7% is ideal, yet they continue to intervene with further stimulus.



Last week saw the CBC cut their cash rate by .025 however, in stark contrast to the Australian position, lowered the threshold for capital holdings for the country’s banks – in fact, the fourth time they have made this move.

This was good news for the Dow Jones over the weekend (up 0.90% on Friday trade), and is expected to push the ASX higher this morning (Friday: 5,351.6 - up 1.6%). One thing you can bet on is that members of the Reserve Bank Board will be watching international markets very carefully for the next week ahead of their meeting on Tuesday.