- This article differs from the print version and includes the Reserve Bank announcement yesterday cutting the official cash rate by 0.25 points to 5.25%.
On August 5 the Japanese stock market had its biggest daily drop in 37 years.
Peter Nicholl
Other share-markets quickly followed. The story spread around the world that the reason was that markets were rattled by the prospect of a recession in the US. That view, in turn, was based primarily on a single new piece of economic data – the US economy had created far fewer new jobs (114,000) in July than the 175,000 the markets had expected.
Some central banks had already started lowering their official interest rates: Switzerland (March), Sweden (May), ECB and Canada (June) and the Bank of England (August). The US Federal Reserve and the Reserve Bank of Australia had taken recent decisions to leave their official interest rates unchanged.
Market pressure Immediately fell on these two central banks and on our reserve banks to fall into line and begin lowering their policy interest rates urgently.
This is a classic case of the financial markets becoming spooked, looking around for a simple reason for their panic and, believing they had found it, piling the pressure on to blame someone else for their problems.
The share market falls had started the week before in the Nasdaq exchange in the US, which is heavily weighted in tech stocks. This market had seen huge rises over the previous two years driven by the prices of a handful of tech stocks. The feeling had been growing that most of these share prices were overvalued.
In the days just before the Nasdaq price collapse, one of these giants, Intel, had announced that it was cutting 15,000 jobs and there were rumours that another, Nvidia, would be delaying the release of its new AI chip.
Once a correction in the share prices of these large tech stocks started, traders got spooked.
But as always seems to happen with asset prices, the time when risk is becoming extreme in a market is when the prices are rising extremely rapidly and are beginning to lose contact with fundamentals – we have seen it with tech stocks, housing, cryptocurrencies. When this happens, a market correction becomes inevitable.
Once the correction starts, automatic market trading mechanisms often exacerbate it. This happened on this occasion.
Added to this tension within the financial markets themselves was the sharp increase in political tensions, especially in the Middle East.
So it seemed a bit rich to me that the financial markets blame the problem on slow-moving central banks. This seemed even more the case when after a few days most of the global share mark began to recover.
- Where does that leave our Reserve Bank? The Reserve Bank announced yesterday it’s cutting the official cash rate (OCR) by 0.25 points to 5.25%. It had been at 5.5% since May 2023, following a long period of increases, starting back in October 2021 when it was lifted to 0.50% from the pandemic level of 0.25%.
The dominant view of market commentators had been that it would move the cash rate down before the end of the year but before the recent global share market dramas, not many were expecting the first downward change to be this month. Suddenly, the mood changed and there was pressure to move.
