The bank cited a variety of reasons for the cut, including turbulent financial markets, falling commodity prices, slowing economic growth China, and the recent rash of rate cuts issued by other central banks around the world.

Specifically, Australia joins the United States, China, India, Japan and South Korea, all of which lowered borrowing costs in the past week. The European Union and United Kingdom are expected to follow suit this week.

“International economic data have continued to point to significant weakness in the major industrial economies, and there have been further signs that China and other parts of the developing world are slowing as well,” Reserve Bank Governor Glenn Stevens said in a news release. “These conditions have contributed to further falls in world commodity prices.”

Also in the bank’s release, Stevens said the rate cut could hamper the central bank’s goal of reigning inflation to 2% to 3%. CPI inflation in year‑ended terms picked up to 5%, while underlying measures were just over 4.5%.

But Stevens said he expects inflation to cool by the end of the year.

“Global disinflationary forces will assist in this regard, though the depreciation of the exchange rate means that the decline of the inflation rate to the target could take longer than would otherwise be the case,” he said

Possible Recession

Last month, Australia’s All Ordinaries stock index plummeted 14%. And that’s on top of falling home prices and retail sales.

The Reserve Bank hasn’t been this aggressive in cutting rates since Australia’s last recession in 1991, Bloomberg reports.

And more cuts could still be in store.

“We think the cash rate will bottom at 4% by early next year,” Stephen Halmarick, co-head market economics at Citigroup Inc. (C), told Reuters. “They are obviously very concerned about the outlook for global growth, I think that is warranted.”

The caution is warranted given the carnage around the world, but Australia’s economy could be one of the few to emerge relatively unscathed.

Housing prices haven’t fallen nearly as bad as those in the United States. Australia’s government budget is in surplus – a likely effect of soaring commodity prices earlier this year.

And by Christmas, $8.7 billion of a $10.4 billion stimulus package will arrive in mailboxes around the country – which may be the life preserver the economy needs to keep GDP from sinking into the red.

Source: Sensing Recession, Australia’s Central Bank Cuts Interest Rate 75 Basis Points

And a lot of the things I buy have been getting noticeably more expensive — and not by a mere 3% either!

So I read with great interest the findings of a survey by Verdict Research. It found that a typical basket of shopping costs 6% more now than it did in January. That’s not an annual increase of 6% — that’s a 6% rise in five months!

Have a rummage around in the basket, and you see some pretty alarming rises. Cauliflowers are up 44.7%. Basmati rice is 33.3% more expensive. Margarine’s up 19.2%… frozen peas 9.5%. A medium whole chicken is up 25.3%.

The cost of food is soaring. So is the cost of commodities — especially oil. Theory tells us that higher oil prices make us poorer, and not just at the petrol pump. Now we’re seeing the evidence to back up that theory.

High oil costs push up the costs of transport — and of packaging, since oil is used to make plastic. We’re seeing the increase every time we go to the shops — whatever the CPI figures might say.

So… yeah. Britain’s becoming a much more expensive place to live. But that’s only half the story!

I reported yesterday that house prices have fallen 4.4% since last year. They were down 2.5% in May alone. And I don’t think we’re done yet. The housing market’s still looking for its equilibrium. And it’ll take time to find it… with a few false dawns along the way.

Many Britons have a significant portion of their wealth tied up in their house. Now they’re getting less wealthy — right at a time when they need more wealth to maintain their standard of living.

We’re getting poorer while our shopping’s getting pricier.

We’ve got slowing growth and rising prices. Stagflation Britain has become a reality.

But is there anything you can do about it?

Yes. Yes there is.

You see, we can take two important lessons from the ongoing economic strife. The first is that houses are not a great asset to hold (in truth, I’ve always been of the old-fashioned “Houses are for living in, not investing in” school of thought).

I’m not saying rush out and sell your house. Of course not (where would you live?). But if you have some money to invest, well… property ain’t the place to put it. Not right now at any rate.

Where then? Stocks are the obvious answer. But that brings me onto our second lesson.

A lot of UK firms will struggle in the coming months. Their costs are rising, but their consumers are poorer. So they can’t simply pass on all the increased costs.

That spells a profit margin squeeze.

But might there be a loophole? An escape hatch? A way to diversify your portfolio so your investments won’t be dragged down by the British economy?

Our research department tells me there is!

You see, not all UK businessmen are biting their nails every time they open a newspaper. Frankly, some of them don’t even care what happens in our economy…

Fleet Street Research is currently looking at a number of companies who, far from viewing the future with trepidation, are positively bullish!

The team is preparing a report that will tell you the best way to protect your investments in a future downturn.

I’ll be in touch with more details very soon…

Ed Bugos of Gold & Options Trader checks in from Vancouver:

Gold could be ready to end the summer doldrums even before summer begins.

The most relevant area of resistance in the way of this outlook is the 30-point range between $890 and $920. If we don’t get through there before summer, then I am probably wrong.

What I don’t want to see is a drift towards the high end of that range through June, then whack, as summer sets in. In that case, the market could fall back to the mid-high $700’s. But the trade looks better than that here. I think we’ve had our seasonal low. And if your eye is on the right ball, you can’t help but see that central banks are going to keep the pedal to the metal for as long as bond-holders don’t start punishing them for it.

That’s the most important fact driving gold and the commodity bull – the contemporary ideas driving present and future monetary/banking policies around the world. Most of the world thinks
that China’s high CPI inflation rate is tied to its fast growing economy, for instance, but it is not. Growth tends to produce downward price pressures, especially at the final goods stages. The
Chinese economy is starting to see the effects of years of rapid money creation, but the point is that everyone loves to inflate, and no one blames inflation for anything. That’s the greatest story never told… or more accurately, never “heard.”

So what if oil falls back 30%. It will probably fall back to a level that would have shocked the Greenspan Fed back in 2002 when it confidently told us how these things were going to be transitory – at $20-30/bbl! The commodity bull market is not about irrational exuberance, or massive growth in China. It’s about money. And the precious metals own that story.

So far the markets are comfortable buying other commodities as a way to hedge both inflation and growth, and gold has basically tagged along. But when the growth turns to bust, there’s just inflation. It’s gold’s turn to shine… to take back its glory as the most preferable commodity… to become money again. Just writing that makes me realize how early in the game it still is. Who today would believe gold will become money again? Yet, at the top of the market everyone will.

Source: Sell in May? Hold on…

The inflation monster, perhaps…given it’s straining hard at its leash and threatening to break loose altogether. The Bank of England’s chief economist Charles Bean says they are “walking a tightrope” with monetary policy (ie principally calling the shots on interest rates). On the one side they’ve got mischievous commodity prices pushing up prices and stoking inflation and on the other side they are trying to keep the economy growing, even if it’s only at a crawl. The credit crunch has proved “more pervasive and longer lasting” than expected says Mr Bean. The black holes it has left in bank balance sheets has been felt on the high street in the form of as the shrivelled mortgage market.75% of the deals available last summer have now gone reports the Daily Mail which has heaped further pressure on bloated house prices. Morgan Stanley calculate one in ten mortgagees could be looking at negative equity. With recent purchases probably under water already.

Continues below …

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That CPI inflation figure is way off anyway says the Daily Mail. It’s put together its own cost of living index in cahoots with uswitch.com and moneysupermarket.co.uk. Together they find inflation coming in at 15.5%. That means the average family will be paying an extra £100 a year for higher costs of food, energy and transport.

Oil we noted yesterday at $115. Veteran oil investor T Boone Pickens sees more upside still – $125 on the horizon. That’s more unwelcome news for car drivers but perhaps of qualified good news for the Exchequer. North Sea oil may be running out fast but what’s left is selling for more than ever and should offer some sustenance to empty government coffers. Britain’s budget deficit for March was £10.2bn. The highest since records began in 1993. Better news for the Chancellor elsewhere as public borrowing for the past financial year at £35.6bn comes within his budget forecast of £36.4bn.

As for food prices, the rice crisis took another turn. The Philippines has failed for the fourth time to secure the rice it needs. Bangladesh has come away empty handed too this week. This from the FT.

“Rice prices hit the $1,000-a-tonne level for the first time on Thursday as panicking importers scrambled to secure supplies, exacerbating the tightness already provoked by export restrictions in Vietnam, India, Egypt, China and Cambodia.”

On a humanitarian level this is a global crisis threatening the world’s poor. 100m could be affected says the World Bank. At the economic level, the idea of the commodity super-cycle is back on track following a pull back. Now it’s the ‘softs’ leading the charge in higher prices…wheat, maize (corn), rice. But if you’re considering a leap on this investment bandwagon thinking this is a one way ticket, ponder a moment the cautionary words of George Soros.

“You have a generalised commodity bubble due to commodities having become an asset class that institutions use to an increasing extent.”

So now the big money is buying up the farm as well as the mining supply, prices are heading for the moon seems to be his message. Commodity investment increased by 20% to $400bn in the first quarter according to Citigroup. But it is a bubble still in the “growth phase” says Soros implying there’s some way to go yet. A view shared by his ex-partner and long-time commodity bull, Jim Rogers. Having identified the commodity boom in 1999, he sees it lasting for years yet, to 2014 at least.

The price of rice is now three times higher than it was a year ago and buyers are attempting to buy additional supply to stockpile. Gold meanwhile “holds steady as market eyes $950,” reports Reuters first thing this morning. The market’s eyes must have wandered since as it’s slipped back to $4 to $935. Another commodity to have soared is coal which has turned the old pit pony business of UK Coal into something of a thoroughbred. It quadrupled profits for the year. Up from £17.6m to £69m.

In the US market, Citigroup has written down another $12bn. These monstrous numbers appear to have lost anyshock value long ago. Better news from internet search engine business and mother of all online knowledge (or what passes for it), Google It announced forecast-beating revenues up 42%.

Back in London, the stock market welcomes a new name today in the merged financial information group Thomson Reuters. They promptly get marked down 14% in early trading. Not the best time to be launching any kind of financially-related company in the public domain.

Record high employment numbers reported earlier in the week are now being assaulted by news of job losses. On the high street, JJB Sports is closing branches and laying off 800 and in the City the long expected cull is starting to happen. 1,300 are being culled reported London’s Evening Standard last night – 900 from UBS and 400 from Merrill Lynch. A further 1,000 are expected to go at Citigroup with an announcement expected later today.

Job losses are not the only feature of bank retrenchment as we see from reports today concerning RBS. They’re considering going cap in hand to shareholders with a £12bn rights issue to shore up their balance sheet say reports. Such a move if it happens might see CEO Fred ‘the Shred’ Goodwin get shredded himself as shareholders seek vengeance.

Intriguing news from the mortgage market… In spite of much reduced consumer choice, rate increases and larger deposits, mortgage lending rose 5% in March according to numbers from the Council of Mortgage Lenders. Still 17% down on a year ago and the CML think overall lending this year could be half the level of 2007.

They’re hopeful the Bank will deliver lower interest rates but have they clocked the oil and wheat prices of late..? Some small encouragement comes from the closely watched Libor rate for interbank lending. The key 3-month lending rate has edged down slightly to 5.91% (if we can trust the read). More needed.

Regards,

Rob Mackrill
The Daily Reckoning

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