WHILE disappointing for struggling retailers hoping for a pre-Christmas boost from a further rate reduction, the Reserve Bank's decision to leave the official cash rate unchanged was not unexpected. The Australian economy is much stronger than it was when the global financial crisis hit. There are also tentative signs of a stronger US economy and indications the slowdown in China may not be as severe as expected.
While there's a possibility of another rate reduction in December, the RBA has time on its side to allow it to postpone a decision until the new year. This will allow a considered assessment of the effectiveness of the 1.5 per cent a year rate reductions already implemented.
It will also become clearer whether the federal government will be able to achieve its objective of a small budget surplus in 2012-13. The latest independent research suggests this could be frustrated by lower than projected company and minerals tax collections. Whether the budget achieves a relatively small deficit compared with those of the past three years or a surplus will have only a marginal impact on the level of economic activity.
Of much greater importance to future growth is the need to ensure there's scope for further rate reductions for as yet unforeseen deterioration in the world economy. The jump in inflation in the past quarter is a reason for the RBA to move cautiously.
It's becoming all too clear also that reducing interest rates is not an effective way of reducing the value of the Australian dollar. Even with lower interest rates on offer, the Australian economy is still an attractive destination for part of the cash and investment portfolios of overseas institutional and personal investors. This is shown by the minimal impact on our financial system of the repatriation of European investments in Australia.
Asian and sovereign wealth funds have been only too willing to replace European investors and lenders, especially given their huge reserves and lack of attractive investments elsewhere.
The Australian economy represents 2 per cent of the world economy and even a small 5 per cent allocation of an overseas investment portfolio would be overweight with Australian assets. This is why, as long as our AAA rating remains, foreign investors will continue to be keen on being overweight in their allocations to Australian assets.
For this reason, reductions in our interest rates are unlikely unless the RBA feels there is a pressing need to stimulate the economy.
Daryl Dixon is Dixon Advisory's executive chairman.