The RBA Seems To See Global Recovery In A Different Light

FXEmpire   |  February 7 2012 4:42 EST

By FX Empire.com

The RBA Seems To See Global Recovery In A Different Light

Or at least the fairy tale version of the current global economic situation would have us to believe along with the Director of the Royal Bank of Australia.

This morning in a surprise move, the RBA held current rates.

The move defied expectations of a third consecutive cut, with 13 of 14 leading economists surveyed by AAP forecasting that the central bank board would lower rates. In the prior to meetings in 2011 the RBA reduced interest rates by .25% and were expected to follow the same guidance in todays meeting.

ANZ was the only major financial institution to predict the RBA would stay on the sidelines but it expects a rate cut in March.

Fresh global optimism outweighed the central bank’s concerns about the strength of the Australian dollar, weak business confidence and struggling retail and construction sectors.

Over the past few weeks there have been some positive signs of recovery and some solid economic data and even those that came in below forecast, had bright spots if you looked into the data. This is the responsibility of the RBA and they evidently have done their homework looking deep into global economic data to come up with their own interpretation.

At least the RBA did not cave to public and political pressures.

Unfortunately no matter how you interpret the data, no matter what bright spots you find, no matter how many clouds will silver linings are out there, the is an elephant in the room, called Greece or more precisely known as Greece, Spain, Ireland, Portugal and Italy, more fondly called (PIIGS). Each of these countries is exhibiting economic problems, with little growth and growing unemployment and shrinking economies. Sooner or later they will have to be dealt with. These countries or economies are putting a dent in the global economic recovery.

Last week, Prime Minister Gillard at a breakfast speech before the Israel-Australia Chamber of Commerce came out publicly and stated that the eurozone was causing problems for the economic health of nations around the globe.

The Prime Minster stated that the European crisis was of a different nature – one stemming from concern about sovereign risk and the need for eurozone governments to undertake “long-term fiscal repair”.

“If anything of value can be retrieved from the wreck of failed economic approaches in Europe … it is the lesson to the world: fiscal discipline matters,” she said.

“My firm conclusion is that handing down a budget surplus in May is the right call in the present economic circumstances.

“Our fiscal policy must be disciplined and must be seen to be disciplined as well. It’s in our interest to keep ourselves well ahead of the pack.”

She concluded today another driver for the currency had been investors using it as a substitute for betting directly on growth in the region, especially in China.

This was Australia’s reward of the Government’s fiscal discipline, she said.

“Add the relative woes of European economies – touching even traditional currency strongholds like Switzerland – and for the first time in history Australia is being referred to as something of a global ‘safe haven’,” she said.

Just a few days ago Federal Reserve Bernanke noted that the US economy was still fragile and in a slow recovery and was not necessarily protected from Europe and that it was too soon to tell if the US would escape unscathed from the EU crisis.

Bernanke also noted that the Fed was in daily contact with their counterparts throughout the world monitoring the Europe and Global Crisis closely…

Everyone should be watching the EU closely, as there is no clear path, no roadmap to recovery. There seems to be no plan, no agreement no direction.

Just yesterday, it seems that Merkel and Sarkozy have put their collective foot down and told Greece it is time for them to deal with their own problems that the EU and the ECB would not offer any additional help or changes to earlier guidelines.

RBA governor Glenn Stevens said todays statement that acute financial pressures on banks in Europe were alleviated considerably late in 2011, following actions by eurozone leaders. This is not the overall opinion, many economists think that this caused additional problems that are being masked by the funding provided to banks.

“Much remains to be done to put European sovereigns and banks on a sound footing, but some progress has been made,” Mr Stevens said.

“Financial market sentiment, though remaining skittish, has generally improved since early December.

“Share markets have risen and term funding markets have reopened, including for Australian banks, albeit at increased cost compared with the situation prevailing in mid 2011.”

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