The Distillery: Dollar divination

Two commentators take a noticeably global perspective in their weekend musings about the Reserve Bank of Australia and the ultimate destination of Australian interest rates. Also in this morning’s edition of The Distillery, Lloyd Blankfein’s visit to Australia gets a closer look from one business scribe who believes Australia’s current dour mood is more justifiable than the Wall Street giant is letting on.

Firstly though, The Australian Financial Review’s economics editor Alan Mitchell warns that the Reserve Bank could once again face a strong currency when Japan’s money printing really starts to take effect.

“Australia could then find itself heading into the place already occupied by Canada and New Zealand, where the monetary authorities have been forced to keep interest rates low despite overheating the property markets. Both countries have turned to macro-prudential policies, in which the long-standing prudential regulations are adjusted to protect the financial system against the risks of asset price bubbles. In Canada, a housing boom has been an unwelcome by-product of the low interest rates needed to support growth in the face of fiscal consolidation and a strong exchange rate boosted by safe-haven capital inflows.”

The Australian’s economics editor David Uren writes on the complaints being made against the Reserve Bank for only providing hints of which direction the next interest rate shift will come, rather than a ‘forward guidance’ of where they’re heading more generally.

“The European Central Bank and the Bank of England are the latest to join the trend. It was a wrenching break for the ECB, which had long held, like the Reserve Bank, that there should be no ‘precommitment’ to a rates strategy ahead of each meeting. However, its president, Mario Draghi, promised at the beginning of this month that the ECB would keep rates at, or below, their current level for 'an extended period'. On the same day, the Bank of England, under its new governor Mark Carney, said that rising market rates had shifted expectations for the bank rate above levels that were justified by the economic situation. The US Federal Reserve has been more explicit, saying it does not expect any rise in the benchmark rate before 2015, while its program of quantitative easing will continue until the jobless rate falls to 6.5 per cent. It was in fact the Reserve Bank of New Zealand that pioneered the use of forward guidance. Its approach, introduced in the late 1990s, was to outline with each quarterly monetary policy statement where it expected 90-day bill rates to be over the following 18 months.”

Meanwhile, The Australian’s John Durie picks up on the critique of Goldman Sachs chief executive Lloyd Blankfein about Australia’s needless negativity. He’s right in a sense, but…

“Where he misses is in ignoring the fact that the mining boom made the macroeconomic numbers look great when, in fact, the real economy was fading. News Corp Australia boss Kim Williams said it well at a Wesley College breakfast in Melbourne yesterday noting: ‘We are a small population in a vast land in a region which is the crucible of economic and talent growth in world affairs, and I would suggest we are underperforming demonstrably.’ Williams, like his Business Council comrades, is increasingly frustrated by a national policy debate that is dysfunctional, confused and is sadly leading Australia to miss the opportunity on its doorstep.”

The Australian Financial Review’s Andrew Cornell also focuses on the visit from Blankfein and comes up with just about the best turn of phrase The Distillery has seen from a business journalist.

“…There is no denying a sounder and safer system is also more costly, less innovative and less profitable for bank investors. But Blankfein added the rider that is in every briefing sheet of every major banker in the world: if regulation is too onerous it will threaten credit creation and allocation and will have to be “adjusted”. One man’s calamari is another’s blood-sucking vampire squid and the essence of the debate here is in the seasoning.”

That’s some brilliant writing! Meanwhile, in coming weeks corporate Australia will hand down their results and Fairfax’s Malcolm Maiden notes that the broad tip is that the ASX 200 will report combined earnings per share of $324, which is down 10 per cent on the estimate from a year ago.

“It's worth noting that even on the eve of the actual profits being reported, the downgraded forecasts are still not rock solid. The ASX 200 forecast is a composite of individual predictions of company profits by broking analysts, and analysts always tend to be a tad overoptimistic about the companies they track. They know the companies they track and the people who manage them, and as a result succumb as a group to a sharemarket version of Stockholm syndrome, the phenomenon whereby hostages sympathise with their captors.”

In company news, The Australian Financial Review’s Matthew Stevens brings us the results of research by Citi’s Elaine Prior the rates the efforts of some of Australia’s biggest corporates in stamping out bribery and corruption and they’re pretty disappointing. Only Rio Tinto and BHP Billiton are up to standard.

Fairfax’s Elizabeth Knight offers a considered and lengthy reflection on the first five months of Hamish McLennan’s time at the top of Ten Network.

Fairfax’s Michael West reports on the unfortunately timed upbeat assessment on McMillan Shakespeare from Citi Research, which came just before the proposed fridge benefit tax changes from the Rudd government.

Speaking of which, with Prime Minister Kevin Rudd putting Labor in a worryingly strong position, Business Spectator’s Stephen Bartholomeusz writes that other companies on the ASX will be wondering, ‘Who’s next?’

The Herald Sun’s Terry McCrann casts a very sceptical eye over the ‘commitment’ by Treasurer Chris Bowen to deliver a budget surplus in 2016-17. He has a right to be sceptical in the wake of the broken promise of his predecessor Wayne Swan.

And finally, Fairfax’s Ross Gittins is continuing to deflate the lofty notions around economic reform, stating again that reform is a synonym for ‘change’ and change comes at a cost each time it’s made.