What is the Reserve Bank to Do?

The Australian Reserve Bank is between a huge great black hot rock crawling with ants and a very hard place.

There is growing pressure on the Reserve to lower the wholesale interest rate by at least 25 basis points (a quarter of a percent) down to 4.00 percent on the first Tuesday in May. On the “lower the rate” side the Reserve has to factor in the ongoing declining retail market causing many retail businesses to cut back (such as David Jones), and in some cases close up shop or put any expansion plans on hold (such as Harvey Norman). It also has to factor in the impact of the high dollar on the Australian manufacturing industry which is bleeding from every joint. Even though new car sales for the last three years have all been bumper numbers you have local car assembly plants letting hundreds of people go over the last 12 months and shutting down parts of their plants—because we are all buying imported cars (because of the high dollar). Then there is the tourism industry which is claiming a staggering 40 percent drop in turn-over in the last two years.

But then on the other side you have one of the Reserve Bank’s pet concerns, which is the unhealthy over-priced status of the home property market. The Reserve Bank would like to see the home property market ‘reset’ by a further 10 to 15 percent before it flattens out or takes the pressure off. A further 10 to 15 percent ‘reset’ in the home property market would bring it just into the healthy zone based on the the cost of the average property in relation to the average household income.

In addition to the above the ‘regular outgoings’ for the average household have increased significantly over the last two years due to climbing power, gas, water, insurance, rate, petrol, and food costs.

So what will the Reserve do? They truly are in a no-win situation. If they lower the rate, as vested parties such as the real estate industry are demanding, with new home sales plummeting by 25 percent in the first three months of this year, then they risk home prices going up which is something they have been fighting against for over three years. If they leave the rate at 4.25 percent then they risk hurting manufacturing, retail, tourism, and the average householder even more.

And I thought deciding on whether to upgrade to a new computer was a tough decision!!