THE DISTILLERY: Rate cut reasoning

Jotters play catch-up after the Reserve Bank's unexpected rate cut, while others unpack Stephen Conroy's underwhelming digital spectrum sale.

The Reserve Bank's rate cut yesterday caught the commentariat almost uniformly by surprise. Perhaps less shockingly, we today find most scribes on the back foot.

Wondering why the Reserve Bank would cut when the economy hasn't suddenly weakened, Fairfax's Michael Pasco thinks the reasoning might lay in what the central bank didn't say.

"For mine then, the missing words are 'fiscal policy'. More than enough is now known about the federal budget and state government ambitions to see that politicians of all stripes are pushing tighter fiscal policy, even while failing to achieve a promised surplus. What’s broadly missed is that a federal deficit of, say, $15 billion this year (to use AMP’s guesstimate) is still an extraordinary tightening of fiscal policy."

At The Australian Financial Review, Alan Mitchell is more blunt: "This was one for the dollar."

"The Reserve Bank of Australia’s decision to slice another 0.25 of a percentage point off the official cash rate was largely to make up for the Australian dollar’s failure to depreciate in line with the economic fundamentals."

Mitchell's colleague Chris Joye, however, thinks the Reserve Bank cut for two reasons - neither of which has much merit, in his opinion.

"The first is because with core inflation around the bottom of the Reserve Bank’s target band, the central bank felt it could offer more monetary stimulus without, it alleges, risking destabilising equities, bonds or housing bubbles. The second explanation is because it was the demonstrably easier decision for the Reserve Bank’s dovish board to make. The tougher call would have been to hold its nerve. And this Reserve Bank has a track record of taking the easy options."

The Australian's Adam Creighton agrees the case for a rate cut was weak:  "It increases the risk of a housing price bubble in the future and undermines the predictability of monetary policy."

"In the long run, central banks perform best when their actions are predictable. They are then able to move markets with words rather than potentially costly actions. Economics students are taught the massive "option value" of not proceeding with an investment. It is also as true with monetary policy. Once rates are cut, pride dictates that they are not easily reversed. Economic history shows it is very difficult to project the economy's course. Rather than trying to finetune the economy, official rates should be altered only when the case is overwhelming."

The other startling development yesterday, more for the government than anyone else, is that Stephen Conroy's digital spectrum sale came in $1 billion short. 

However, the less-than-expected $2 billion in spending, shared by Telstra, Optus and TPG, is good news for investors, according to The Australian Financial Review's Chanticleer columnist, Michael Smith.

"The outcome of Tuesday’s auction is bad for the government and good for shareholders in Telstra and Optus owner SingTel. The decision by the companies not to overpay could be good news for consumers further down the track as they will have more money to invest in providing better services. Less capital spend also means the prospect of higher shareholder returns, something the market is prioritising at the moment."

At The Australian, John Durie hits out at Conroy for compromising more than the federal budget. He argues the Communications Minister is also damaging the Australian Communication and Media Authority's independence by telling the regulator not to sell the 30 per cent of unwanted digital spectrum at below reserve price for at least two years.

Business Spectator's Stephen Bartholomeusz, meanwhile, brings up Conroy's rather embarrassing declaration last year that the big wireless carriers were so desperate to take part in the bidding process that they would wear red underwear on their heads if he told them to. Perhaps not.

In other corporate news, Fairfax's Elizabeth Knight considers the complexities of Richard Branson selling down his stake in Virgin Australia, as rumours swirl. 

And over at The Australian, M&A guru Bryan Frith offers his take on Perpetual’s tilt at The Trust Company, which could turn into a bidding war.

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