matisse capital management

Reserve Bank of Australia Raises Key Rate

First central bank raise in 2010.  The Reserve Bank of Australia raised its cash rate today by 0.25% to 4.0%.  The bank's inflation target is 2-3%.  It began easing during this recession in the third quarter 2008 (see chart, left), dropping rates from 7.25% to 3.0% by April 2009.  This was followed by (now) four 0.25% rate hikes, starting in October 2009.  Although prices in Australia were up only 1.9% in January, year over year, the bank believes inflation could rise to 3.0% in 2010 (per Bloomberg), and it made a preemptive increase.  This was the first raise by a major central bank in 2010.  Economists project the bank could raise the cash rate to 4.5% this year (WSJ).

Negative Real Interest Rates and the Fed

 The Fed cut the federal funds rate by 50 basis points last week, to 1.0%.  In doing so, Bernanke has taken the rate right back to 2003 levels, when Greenspan also had the rate at 1.0%.  Unfortunately, the Consumer price Index data released in September showed year over year inflation of 4.9%.  This means that real interest rates are negative at the present time, and that was exactly what created the commodities and property boom and bust of 2003-7.  This approach is a return to the status quo of the last few years and like trying to cure a hangover with another drink.  So why does it matter if real rates are negative?

Trichet and the ECB: Which Way Now?

The Irish Times just reported that Eurozone inflation increased to 3.6% in May. This certainly  reduces the chance of the European Central Bank (ECB) cutting rates on June 19, when it meets again in Frankfurt. Why? The ECB’s primary stated objective is to maintain price stability by keeping inflation at or below 2%. Its secondary goals are promoting a "high level of employment" and "sustainable and non-inflationary growth among the member states.”  So what does this mean for the euro; will it hit new highs against the dollar?