The financial crisis continues, in the parlance of central bankers, to surprise on the downside.

The Reserve Bank Board has decided that the risks to economic growth are serious enough to outweigh what it still expects to be a surge in inflation into 2009. And most seriously, it’s economic growth in Asia that it is worried about – sufficient that it thinks the commodities boom is over.

In fact 1% suggests the Bank is not so much worried as near panic. It’s the sort of reduction that the Federal Reserve was producing last year while trying to stave off the sub-prime crisis. It’s entirely possible financial markets will read that into the decision and react accordingly, although the initial reaction was positive.

On this outlook, the Government can probably forget about a surplus of $22b. The Opposition’s blocking of Budget tax increases in the Senate will now take on a more concerning aspect. For months the Government has been talking about a Coalition raid on the surplus, but no one particularly minded because we all figured the surplus would come in over expectations anyway. That’s the way it’s been for much of the decade.

Not any more.

The size of the cut also short-circuits the debate over how much of it should be passed on by the banks. It means they have no choice but to pass on a significant chunk, which was probably part of the Bank’s thinking. The actual number doesn’t mean anything; it’s the likely pass-through that’s the key.

And who predicted 1%? No one. We’re in territory that we haven’t been for a long, long time, where pundits and commentators are as clueless as the next guy, where business leaders can do nothing but watch helplessly, where the levers are being yanked as hard as possible because the regulators are terrified and have no idea what bad news is coming next – only that it’ll be worse than they expected. In short, this is out of control, and good fortune as well as good management will be needed to stave off a serious downturn. Let’s hope Rudd and Swan are lucky leaders.

Peter Fray

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