Australia highlighted to the world that -- unlike other nations
-- they still has 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 (
) 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.
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.