Tomorrow Australia’s inflation figures are released. These will provide much for the Reserve Bank of Australia board to talk about next Tuesday.

Prior to Christmas there seemed no doubt interest rates would remain unchanged. RBA governor Glenn Stevens said he could see no reason to cut rates further.

He justified this reasoning by suggesting that if businesses are not willing to borrow at the current historic low rates a further cut of 0.25 per cent won’t suddenly entice them. All such a cut would accomplish would be to pour more fuel onto an already overheated property market: Where businesses are not prepared to borrow homebuyers, it seems, are. And there is already much speculation suggesting the current booming house prices are indicative of a flooded market rather than any intrinsic quality in the homes being built.

Rather, the RBA governor believes there is more economic benefit to the Australian economy through lowering the Australian dollar and making our exports more attractive. One figure bandied about was 75 cents to the US dollar. And cutting interest rates wouldn’t help lower the dollar; as overseas investors would receive smaller returns on a weakened currency.

But here’s the rub: Should Australia’s inflation figures be lower than predicted Glenn Stevens may have to cut interest rates anyway. By cutting interest rates he would (even if only as a gesture) be stimulating the economy as people rush to borrow and look to shift their deposits from miniscule interest bearing accounts to riskier/ higher paying dividends. By doing so (it is hoped) the increased economic activity would push Australia’s inflationary figure towards the target of 2-3 per cent.

Both Europe and the US have slashed interest rates and printed money. This combination has pushed up their inflation figures, boosted their stockmarkets and kick started their economies. Switzerland, in an effort to stimulate investment, cut rates to minus 0.75 per cent! Yes, you put 100 Swiss francs in the bank and at the end of the year you have 99.25.

So the RBA still has room to move on interest rates. But they’ll be watching tomorrow’s inflationary figures very closely.

The great unknown in all this is China. The release of China’s subdued growth figures last week was greeted by scepticism by many around the world. Despite their claims of a slowing growth rate China are still buying massive amounts of Australian iron ore and benefitting from the same cheap oil prices the rest of us are.

When the game China is playing becomes known it will figure large in any RBA decisions on interest rates.

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