Reserve Bank will likely defer needed cut

With a worsening global economy and rising unemployment here, the Reserve Bank should cut interest rates by a further 50 basis points today.

However, "well-connected" commentators say the Reserve will sit pat for another month, so Henry's wish may not be achieved.

The global news includes some cheer.

In many places the message is that the rate of decline seems to be slowing.

More importantly, the leaders of the G20 nations have met in London and reached some sort of accord.

The G20 leaders released a "six-point plan". This includes tighter controls on an extended number of financial institutions, including hedge funds, a common global approach to dealing with toxic assets, a $US1.1 trillion ($1.53 million) package (doled out via a strengthened IMF) to supplement the $US5 trillion stimulus to the global economy by individual countries; $US200 billion of trade finance over the next two years to help reverse the steepest decline in world trade since 1945; more power to developing nations within international agencies including the IMF and OECD; and a pledge that the fiscal stimulus, including the sale of gold by the IMF due to raise $US6 billion, will help the poorest nations and create green jobs.

The idea of a global super-regulator of all significant financial institutions, including hedge funds, fills Henry with apprehension. So too does the apparent evolution of the IMF as a global central bank and the OECD as some sort of global Treasury.

The details of how to deal with "toxic assets" were not spelled out, so one presumes there will be some version of the American plan, which itself is not certain to work well, if at all.

All the standard objections to fiscal stimulus of demand apply - negative effects on confidence, minimisation of stimulus to the extent that handouts are saved rather than spent, "crowding out" of private spending as recovery builds and indeed the strong inflationary risks due to the inability of these crypto-global agencies' to withdraw stimulus as recovery builds.

Still, the immediate effect was positive for confidence, as shown by the rise of global equities as the G20 met.

Locally, there have been several bits of news that, together, make a case for further easing.

Most importantly, the real rate of unemployment is moving sharply upward.