THE DISTILLERY: Banking on strength

As expected, the Reserve Bank of Australia kept interest rates on hold at 3 per cent and reiterated its preparedness to cut rates if necessary. What’s motivating this? What are its implications? Is it prudent? This morning, Australia’s business commentators investigate.

Fairfax’s Malcolm Maiden does what the good commentators do: he looks at last month’s statement and finds that the central bank’s specific observation about stability of inflation and sub-par economic growth giving it room to cut remains.

“On Tuesday, when it left the cash rate alone again, it said the same thing. It is maintaining what JPMorgan economist Stephen Walters a week ago called a ‘tactical pause’ when he maintained his prediction that rates would be cut one more time to 2.75 per cent, but pushed his estimated timing out from May to November. It’s a tactical pause because the Reserve is dealing with a strong Australian dollar, and won’t signal that it is done with rate cuts until it is confident that there’s accelerating growth in the part of the economy hurt most by the dollar’s strength, and by interest rates that stayed relatively high to contain inflation when the resources boom was raging.”

The Australian Financial Review’s Jennifer Hewett says the Reserve Bank’s decision to sit is still actually a gamble.

“The gamble is that the Australian economy is strong enough to do without any urgent additional boost from monetary policy. That other parts of the economy will revive quickly enough to compensate for the coming slowdown in resources investment that has powered Australia for the past few years. That business confidence and demand for credit will slowly but steadily increase. And, of course, that the constantly threatening disasters and imbalances in the global economy continue to simmer away, rather than implode.”

Business Spectator’s Stephen Bartholomeusz hits the exact same beat, while also emphasising that the domestic economy still faces some threats that the Reserve Bank has to respect.

“Offshore, negative real interest rates, quantitative easing programs and unsustainable public finances remain issues and potential threats. While China has stabilised its growth rate at ‘a fairly robust pace’ it is trying to rebalance the composition of that growth. Commodity prices have fallen, albeit to levels that are still high by historical standards, and the peak of the mining investment boom that has sustained the economy in recent years continues to draw closer. The Reserve Bank’s hope is that as it peaks other areas of the economy will have more scope to improve. The major question mark over whether there can be a smooth transition from declining resources investment to growth in other sectors of the economy is the continuing resilience of the Australian dollar, which has had a chilling impact on the non-resource trade-exposed areas of the economy.”

Fairfax’s Michael Pascoe points out that the arguments that underpin predictions that the next move from the Reserve Bank will be an increase pay little attention to what the central bank is actually saying.

“After the last board meeting, the money market was still betting on two more 25-point trimmings of the cash rate this year. Now it’s down to just one cut and some of the braver commentators think there could be none, that the next move by the Reserve Bank will be up. Such a prediction is a quick way to grab a headline. It also means a rather optimistic view of the Australian economy as it implies a seamless transition from relying on resources infrastructure investment to housing and consumption for growth. That’s not what the bank is forecasting. I hope the optimists are right.”

The other interesting discussion going on this morning – well, some people justifiably don’t find interest rate talk interesting – is the subject of Australia’s Free Trade Agreement with the US, specifically the increasing length of time we’re happy to grant patents.

Fairfax’s economics correspondent Peter Martin says it’s taking our generic manufacturers to the cleaners for the domestic drug developers that we don’t really have.

The Australian Financial Review’s Alan Mitchell makes the point that Australians are paying less for drugs than Americans, where these drugs actually come from. The drug companies have to play a balancing act and, at the moment, Australians are still getting a sweet deal.

In company news, The Australian’s Richard Gluyas reports that the lessons from Billabong International’s unsuccessful aggressive expansion are being learnt, but at Pacific Brands.

The Australian Financial Review’s Chanticleer columnist Tony Boyd looks at the potential quandary facing Orica chief executive Ian Smith. The market is increasingly betting that the provider of explosives to mining companies is about to hit an earnings wall.

Fairfax’s Max Newnham dismantles Prime Minister Julia Gillard’s spin about how superannuation is a Labor “creature” that it would always “nurture”. Fairfax’s Martin would apparently disagree judging by a separate piece on this topic.

And Fairfax’s Elizabeth Knight points out that if the government tampers with superannuation earnings, then the big focus will shift to companies with big dividend yields that are fully franked.