THE DISTILLERY: Raking over rates

Jotters consider what's next for interest rates, with one suggesting low inflation may flag more cuts.

The Reserve Bank of Australia has kept interest rates on hold not because the domestic economy is going gangbusters, far from it. The international backdrop, against which it took out some insurance in December, has improved in almost every conceivable way. But to mistake this for a sign of confidence in the Australian economy would be, well, a mistake.

Fairfax’s economics correspondent Peter Martin said the "unusual” statement from the Reserve Bank made it pretty clear that although a cut wasn’t needed for the month of February, Stevens believes in an "accommodative stance” on rates as the economy enters an identity crisis of sorts.

"The bank believes the mining investment boom is about to peak. Beyond that it sees very little to pick up the slack. Private investment is weak. Government projects have been curtailed to help the Commonwealth deliver a surplus and to help states cope with budget problems.”

Fairfax’s Malcolm Maiden says the heart of the Reserve Bank’s statement is this paragraph here:

"Inflation is consistent with the medium-term target [at] around 2¼ per cent on the latest reading … with the labour market softening somewhat and unemployment edging higher, conditions are working to contain pressure on labour costs. Moreover, businesses are likely to be focusing on lifting efficiency under conditions of moderate demand growth. These trends should help to keep inflation low, even as the effects on prices of the earlier exchange rate appreciation wane. The bank's assessment remains that inflation will be consistent with the target over the next one to two years.”

Maiden writes, "Translation: Inflation is actually sitting at the low end of our target of 2 to 3 per cent, so there's no barrier to us cutting the cash rate further when we want to – and the forces that are keeping inflation down include some that are keeping rate cuts on the agenda, including weakness in the jobs market, one of our core areas of concern.”

Much to the relief of The Distillery, the Herald Sun’s Terry McCrann is on the Reserve Bank today, where he smashes the central bank’s critics and attacks proponents of a government policy focused central bank.

That’s a criticism of the lead in yesterday’s edition of The Distillery. The kind of approach advocated by The Australian’s Henry Thornton (not the author’s real name) is what McCrann is talking about. Business Spectator’s Stephen Bartholomeusz also comes to the defence of the Reserve Bank.

"It is, of course, easy to argue with hindsight that the December cut of 25 basis points might have been a touch unnecessary. At the time, however, there had been a slew of weak economic statistics, commodity prices had tumbled, the US was approaching the fiscal cliff, China was struggling for stability and Europe was still a source of concern. Since then, commodity prices have roared back (which may be seasonal), China’s growth has clearly stabilised, the US has postponed its fiscal crunch, Europe is still intact and fears about its fate have subsided. Financial markets, inundated with liquidity, are in risk-on mode, with clear impacts on asset prices.”

The Australian Financial Review’s Chanticleer columnist Tony Boyd says Westpac Bank’s Bill Evans didn’t miss the concern the Reserve Bank clearly has for the employment market.

The Distillery would also like to point out that the two main factors that have the bulls excited are the sharemarket surge and the positive signs from the housing market.

The unemployment rate is going up, everyone is in agreement that it could easily rise to 6 per cent by the end of the year as the mining boom investment cycle peaks and a raft of infrastructure projects are completed.

Just where will the housing market go when the jobless rate is almost a percentage point higher.

As for the sharemarket, The Australian’s John Durie has been reporting lately on the risk the market has taken into earnings season and, so far, Macquarie and Cochlear haven’t come through for the bulls.

As you can probably tell by now, The Distillery isn’t bullish. Well, unless it’s Black Bull single malt.

Fairfax’s Elizabeth Knight is also on Macquarie’s results this morning through the prism of what we could expect for the rest of earnings season: "…some glimmers of hope but not enough, which points to a season tinged with disappointment”.

In other company news, The Australian’s Bryan Frith reports on the "solid, but not spectacular” results at Transurban, while adding for good measure that the decision by Chinese private equity player Cathay Fortune to drop its Discovery Metals bid raises serious question about whether it was, well, serious to begin with.

Meanwhile, Fairfax’s Michael Pascoe joins Victoria state political editor Josh Gordon (who’s bloody good for those outside the Garden State) in a discussion about the state’s shrinking project pipeline. Pascoe delivers this terrific line about the Construction, Forestry, Mining and Energy Union as an aside in the debate.

"And given the contribution the Victorian branch of the CFMEU has made to construction costs, it's a wonder unions aren't embarrassed to show their face in any discussion that even mentions the desalination plant.”

Elsewhere, Fairfax’s Ross Gittins follows up his ‘The four business gangs that run America’ column from last year, which named the military-industrial complex, the Wall Street-Washington complex, the Big Oil-transport-military complex and the healthcare industry as the largest wielders of political power.

While Gittins said at the time that Australia isn’t so bad, we have our four. Now he’s named them – superannuation, banking, mining and gambling.

The Distillery would add the automotive manufacturing industry to that list.

And finally, The Australian’s Glenda Korporaal acknowledges that the Future Fund hasn’t met its stated earnings targets over its six and a half years of existence, but that’s okay.

Firstly, the global financial crisis made it perfectly appropriate not to generate an average annualised return of about 8 per cent.

Secondly, the Fund’s growth aims are designed more towards a ten-year timeline and it would be irresponsible of it to go chasing after quick profits in order to ‘catch up’.


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