What impact will Japan’s crisis have on local interest rates?

With Australia’s economy now very much an integral part of the global stage, it’s expected that the tragic earthquake and Tsunami that has crippled much of Japan is likely to have some type of impact on local monetary policy when the Reserve Bank meets over the next few months.

Japan is the second-biggest buyer of Australian commodities, so should its economy come to a halt demand for Australian resources would be cut, easing inflationary pressures flowing from the resources boom.

On the other hand, increased demand for Australian natural gas to repower Japan and iron ore and coking steel to rebuild its cities could intensify the boom.

A recent Sydney Morning Herald article highlighted concerns surrounding fears of a major nuclear catastrophe for our Asian neighbour, with further explosions at the Fukushima power station wiping 10.5% off the value of Japanese shares.

In response, Australian investors bought bonds and bank bills, pushing down yields to the point where the futures market is now pricing in zero chance of a rate rise by the end of the year and a 55% chance of a rate cut in April. However HSBC Australia economist Paul Bloxham says this is unlikely.

”Markets move quickly at times like this and quite often overreact,” said HSBC Australia economist Paul Bloxham.

”The pricing doesn’t make sense. Even with a global shock the outlook for investment in Australia is still strong. I do not expect the Reserve Bank to cut rates.”

“Until yesterday’s frenzied trading, the market had been pricing in one more increase to bring the official cash rate up to 5% by the middle of next year. Now though, it’s forecasting a cash rate slightly lower than 4.75% for March 2012, and every month in between.

”The price action was breathtaking in its speed and execution,” said Credit Suisse consultant Sean Keane. ”The market has put in place precautionary cover in case the bank feels the need to suddenly cut rates. The expectation is the panic will be largely over by the end of the year, and at that point the bank can move back to a hawkish position.”

Separately released figures show lending down generally in Australia in January, with the value of personal finance down a seasonally adjusted 9.5%, commercial finance down 5.8% and housing finance for owner occupation down 4.6%.


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