Lately the front pages of most newspapers have been full of financial doom and gloom. Evidence of this includes large pictures of growling bears, share price graphs that disappear off the bottom right hand side of the page and photoshopped images of banknotes going up in smoke. And let’s not forget the pronouncements of financial journalists who have been falling over themselves to claim that the current economic crisis will be worse than the Great Depression of the early ‘30s.

As is the case with most clouds, however, our current travails do have a silver lining – and this is RBA’s ability to cut rates. In late 2007/early 2008, the RBA made the now silly decision to increase rates several times in order to head off a feared rise in inflation. At the time food, petrol and rents were all going up, thus causing the much watched CPI to rise above the comfort zone of 2-3% per annum.

Unfortunately for those of us who have mortgages and credit cards, it’s now clear that in raising rates, the RBA was driving the economic truck while looking through the rear vision rather than the windscreen. Although the full impact of the credit crunch is only now really starting to bite, it was already clear in late 2007/early 2008 that the perceived problem with inflation would soon be supplanted by potential recession as American homeowners began walking away from their houses (and the mortgage repayments that go with them).

So the RBA can be legitimately criticised for having made the wrong decision with interest rates over the past 12 months. The good news with having raised rates too high, however, is that there is plenty of scope to bring them down again – and fast. Consider the current contrast between Australian official rates with those in the US – there the Federal Reserve has already slashed rates to 1.75%, but with no discernibly positive impact on the faltering economy. Cutting rates further in the US will make little difference, as people in fear of losing their jobs can’t afford to borrow at any price, and are prepared to hand their homes back to the banks as American mortgages are generally non recourse..

In Australia, fortunately, matters are quite different, as official rates were, until recently, 7.25%. Recent cuts have reduced this number to 6.00%, and our masters at the big four banks have been kind enough to pass on about four fifths of this to borrowers. Such cuts make a measurable improvement to household incomes because Australians are both heavily indebted and unlikely to walk away from their homes, the latter because mortgages here do have recourse to the borrower.

The final piece of this hopefully positive puzzle is whether the RBA will in fact follow up its surprise October cut of 1.00% with at least two more of the same magnitude. That the world is heading into recession is now almost beyond doubt. The only question is whether the slowdown is prolonged or relatively quick. This inevitability of recession means, however, that inflation will cease to be an issue for some years to come. As a result, the RBA can and should now focus on its other main goal, that of preserving stability in the Australian economy. Cutting rates drastically is an obvious solution, and one I think Governor Glen Stevens will almost certainly implement in time for Christmas 2008.