Australia needs new economic direction; Turnbull should start on reforms

THERE was a whiff of panic in the Australian central bank's decision last week to cut the official interest rate by 25 basis points to 1.5 per cent. It is being speculated that the Reserve Bank (RBA) had to act because the local currency was again edging up against the US dollar, due to the interest rate differentials. Commodity producers, who form the bulk of Australia's rural economy, were getting agitated as the Australian dollar's rise priced out their produce in competitive markets. Farmers form the backbone of the National Party, the junior partner in the ruling coalition.

Admittedly, the decision was made as the latest inflation data showed that consumer prices rose just one per cent, well below the bank's preferred target of 2-3 per cent. Perhaps, there was fear that the Australian economy could slip into a deflationary cycle.

The RBA also seems to have assumed that people in the mortgage belt would get an effective boost in incomes if lending institutions passed on the cuts to their customers. Unfortunately, the big lenders have decided to pass on only a fraction of the RBA's cut. Instead, the four largest lending institutions in Australia have decided that depositors should be rewarded with a small lift to fixed term interest rates.