Last month there was talk that the RBA would drop official interest rates by 50 basis points or 0.5%. I believed there was justification for them dropping rates by a full 100 basis points; or 1%. I kept my opinion to myself and as history has shown, they did…

The majority of the talk from economists, journalists and commentators is that this afternoon the RBA will reduce rates by another 0.5% (50 basis points). A few economists disagree and say that with inflation still high and the impact of the Australian Government’s stimulus package yet to kick in (in about a month they unleash $10.4b on the economy) there will be no rate cut… or perhaps just 0.25% (25 basis points).

I disagree. Personally I believe there is justification for a rate cut of at least 0.75% and perhaps another full 1%.

Yes we have higher inflation, but the job of the RBA is to keep it between 2% and 3% over the cycle and right now the need to avoid recession is paramount. With the exception of Qld & WA (the resource rich states) the rest of Australia – especially NSW – is doing it very tough. Our biggest threat is that unemployment will rise out of control, further fuelling a drop in both business and consumer confidence; already pushed lower than has been economically justified, by irresponsible negative journalism and those ‘painful pessimists’ being given way too much air play.

I can no more pick what the RBA will do than I can a Melbourne Cup winner… but I can offer Nick’s opinion that the announcement of just a 0.5% rate cut this afternoon will only be “tinkering at the edges”. Personally I half expect the Reserve to go further. Regardless, today’s announcement means a happy day for Katrina and me. Who needs to pick a winner on the horses; we are guaranteed a BIG win?

Christmas is just around the corner, presenting the RBA with a natural stimulus OPPORTUNITY before we hit December and many businesses start to wind down. As mentioned the government’s $10.4b stimulus package will kick in in a month and yes that will help. Leaving a rate cut above 0.5% until December (or worse; early 2009) will miss a window of opportunity to give the Australian economy a serious inoculation against very low business and consumer confidence.

I think Melbourne Cup Day 2008 could see a lot of Australian’s and Australian business owners celebrating a great win when the RBA makes it’s announcement this afternoon. If so, don’t be overly surprised. Globally speaking our interest rates are still high and the RBA is mindful of the many businesses contemplating letting staff go prior to Christmas. I believe that some better than expected news is just what is needed.

The government’s stimulus package will go a long way towards getting consumers spending. This will create jobs and lift business profits. My justification for suggesting the RBA could go even further than economists expect is more about confidence and employment than it is about spending, however.

Do you read my articles in our Friday newsletters? I hope you do… in which case you would already know that I have my considered views on many subjects economical. I am not on the RBA board and have no say in what they do to interest rates. So regardless of how far they may move this afternoon, I believe there remains an argument for a cut of at least 0.75%; with more to follow in the months ahead!

CELEBRATE because whether or not you bet on horse races… every mortgage holder will this afternoon celebrate some sort of a financial windfall!

Happy Investing,

Nick Lockhart

PS: Have you been “freaked out” lately thinking house prices in Australia are about to crash by up to 40%? IMPORTANT!!! Before you act on fear, emotion, the counsel from media and/or those pessimists (who are W.R.O.N.G. by the way), why not get the facts? You can register for FREE to participate in one of two web seminars I am hosting – tomorrow evening and next Wednesday evening. I will clearly articulate FACTS and you will go away encouraged!!!

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