THE DISTILLERY: Half cut

Commentators weigh up the likelihood of an interest rate cut and suggest a hold could be justified.

An overwhelming majority of market economists and commentators agree that the Reserve Bank is poised to cut interest rates on the first Tuesday of February. Taking out a little insurance – very little when the big four aren’t expected to pass on all 25 basis points – against a potentially devastating outlook for the eurozone and a softening employment market at home is simply prudent central bank governing, so the theory goes. But The Australian’s David Uren points out that the banks were expected to pass on only 15 basis points last time, but were forced by sheer political force to hand over 25. So, logically, interest rates are lower now than the RBA expected them to be. Why the need to cut? Elsewhere in this morning’s Distillery, darkening outlooks for insurer QBE has one commentator talking about succession for the insurer’s long-time chief executive Frank O’Halloran, while another finds the ACCC’s widely ridiculed concerns over the Metcash-Franklins merger have been somewhat vindicated.

But first we start with The Australian’s David Uren, who tells market economists and other commentators pencilling in a rate cut next Tuesday to perhaps reach for an eraser.

"When the RBA cut rates in December, senior bank officials expected only half the cut to be passed on to mortgage holders and were surprised that the government's hectoring resulted in full pass-through. Real rates are possibly a bit lower than the board intended them to be, although the rise in the dollar has contributed to a modest tightening in monetary conditions since the end of the year. Traces of the disagreement at the bank's top level have come through in the board meeting minutes, with the presentation of both sides of the argument ‘on the one hand’ and ‘on the other’. In December, it was agreed there was ‘no strong need to cut interest rates’. There is less need now.”

Meanwhile, The Age’s Adele Ferguson is expecting, like many, that QBE chief executive Frank O’Halloran is poised to deliver an underwhelming set of numbers in 2012 with a number of disasters forcing big payouts and takeovers failing to fire growth.

"Succession is the real issue. QBE chairman Belinda Hutchinson batted away questions about O'Halloran's retirement plans at the group's annual meeting last year. 'He looks hale and hearty to me and he doesn't look as though he is going anywhere,' she said. Hutchinson needs to think again. With a share price chronically underperforming the broader market, earnings going backwards, dividends being slashed and a strategy that doesn't seem to be working, the clock has been ticking for the past few years for change at QBE, at both executive and board levels. Insurance is a complex business and having a dominant CEO and only two non-executive directors with insurance backgrounds goes a long way to explaining the current state of QBE.”

Thirdly in this edition of Distillery is The Australian’s John Durie, who takes us ringside to the fight for survival at Supabarn, with Metcash set to stop supplying that ACT and NSW supermarket company.

"The ACCC has argued competition would disappear if Metcash took out the last surviving independent wholesaler, Franklins. Metcash's actions show the ACCC was right but Metcash claims competition only exists against the big two retailers, so the deal doesn't amount to more than a hill of beans. Supabarn was in a privileged position, first with Davids and then Metcash. It was a relatively big buyer, so it received extended credit terms and was allowed to buy fresh produce outside the Metcash group. That gave it some chance to compete against the majors based on better local retail skills. Once Metcash moves in, those advantages disappear, it claims. The wholesaler has a few alternative strategies.”

And The Australian Financial Review’s Chanticleer columnist Tony Boyd says investors should expect an increase in back-door listings to compensate for the unhinged IPO market.

"Back-door listings were common in the high-tech boom of the 1990s when it seemed every second dormant mining company was suddenly transformed into a tech company with wonderful growth prospects. The tech analysts were back-door-listed but within several years the backers were seeking a new asset to back-door into the dying tech company. Bankers say the latest move towards back-door listings will involve much larger companies at the more respectable end of the market. They say the activity will be concentrated in the resources sector because of its growth prospects and the array of privately owned assets looking to access public capital markets. It would not be a surprise if Robert Friedland, the Canadian mining entrepreneur, considered a back-door listing of various assets likely to be spun out of Ivanhoe Mines now that the Canadian listed company is controlled by Rio Tinto.”

Returning to interest rate predictions to round out commentaries from this morning and over the weekend, and the Herald Sun’s Terry McCrann takes the counter-argument that because banks passed on the full 25 basis points at the December meeting, when the Reserve Bank expected them to only pass on about 15 of them, the central bank now has to make a smaller cut. The Australian Financial Review’s Alan Mitchell says while the inflation outlook is within the Reserve Bank’s target band, the employment market is starting to wobble.

The Sydney Morning Herald’s Ross Gittins urges the media to try harder to contextualise downwardly revised global economic forecasts from international bodies like the International Monetary Fund because it becomes all too easy to shoot for a cheap, scary headline that obscures the much more mild reality.

The Sydney Morning Herald’s Michael Pascoe says the World Economic Forum meeting in Davos is a tribute to the old world, given that the world’s second largest and more important economy – China – is hardly represented. Speaking of China, The Australian’s Paul Garvey investigates the movements of a particularly dodgy short-selling technique in the land of the dragon. The Sydney Morning Herald’s Ian McIlwraith says the calls for better workplace flexibility needs to extend not just from employers to employees, but the other way around as well.

In mining news, The Age’s Michael West explains just how hard it is to do business in Papua New Guinea when you’re in the gas industry, while The Australian’s Robin Bromby welcomes three juniors back into the fold after prolonged periods of unfulfilled promises in his column Pure Speculation.

And finally, The Age’s Simon Johanson finds seaside property sellers around Port Phillip Bay getting a better deal than this time last year.