THE DISTILLERY: Rate review

Jotters dissect the latest interest rate snip, with one noting that the door has been left wide open for more cuts.

The commentary on the Reserve Bank of Australia’s latest interest rate decision can be largely broken down into four questions. Was it the right move? Are there any more rate cuts to come? Will the banks pass on the full 25 basis points? And how about that Australian dollar?

Firstly, The Australian Financial Review’s David Bassanese addresses critics of the RBA that they’ve cut for no reason and those who argue that they’ve cut too late. The Fairfax writer begins with the former.

"The Reserve Bank of Australia’s decision to cut interest rates to the lows last seen during the global financial crisis seems like a surprise to some – who can’t understand what the bank is panicking about. After all, the economy has been growing at close to a trend pace, the unemployment rate is still relatively low and underlying inflation is squarely in the middle of its 2 to 3 per cent target band. That’s close to a textbook definition of a perfectly equilibrated economy. Yet for others, the RBA should be blamed for cutting rates too little, too late, given the economy is apparently veering into a post-mining-boom downturn…To my mind, both these extreme views are wrong-headed. The former "what’s the panic about?” school of thought too easily ignores that, due to policy lags, the RBA needs to be forward-looking. And while the economy has been fine to date, it is facing intensifying downside risks as we head into 2013. Indeed, those who argued against interest rate cuts earlier this year – by looking backward rather than forward – now have a little egg on their face.”

Business Spectator’s Adam Carr, to put it mildly, respectfully disagrees with Bassanese’s argument that the RBA has played this one about right.

"Well there we go again, the Reserve Bank cut another 25 bps to 3 per cent. That brings us to about 175 bps worth of cuts so far since the easing cycle started a year ago. No surprises there, I guess, unless you noticed that the economy is currently experiencing broad based economic strength – led mainly by the non-mining sector. Hmm, that must have slipped the board’s collective mind. It really goes to show how farcical the monetary policy decision making process has become – and this is not in the national interest.”

So where are rates heading from here? Fairfax’s Malcolm Maiden is pretty straightforward this morning with his piece entitled ‘Reserve bank hasn’t finished yet by a long shot’.

"Fear of another market crisis that is propelling overseas money here is also alive in a less toxic form in this economy, and suppressing consumer demand and private sector investment outside the mining sector. The hunt on both sides of the political fence for fiscal surpluses also means that government support for the economy will be retreating next year, clipping 1 percentage point or more from growth. The Reserve gave no guidance on future cuts yesterday, but it aims to push down bank lending rates. And because the banks have not been passing cash rates through completely, home loan mortgage rates and small overdraft rates are still almost 1 percentage point higher than were in 2009, when the cash rate was last at 3 per cent. Fiscal settings were more supportive then, and the Australian dollar is about 30 per cent higher now. Two more cuts of a quarter of percentage point in the new year are highly likely.”

The Australian’s John Durie isn’t as definitive as Maiden, but does write that the RBA has left the door "wide open” for more rate cuts.

"The big policy concern is that more rate cuts may have minimal effect on the macro-economy when fiscal policy is under lock and key. The official statement accompanying the decision was decidedly "glass half empty", as one would expect after a rate cut.”

The Australian’s economics correspondent Adam Creighton, and Damon Kitney suggest that there is an element of doubt as to whether the RBA will cut rates again.

"RBA governor Glenn Stevens’ statement yesterday gave little indication about the future path of interest rates. ‘A further easing in monetary policy was appropriate now,’ Mr Stevens said, arguing that it would ‘help to foster growth in demand and inflation outcomes consistent with the target’. Businesses, smarting from the strong Australian dollar, had been calling for months for the RBA to cut rates to help reduce the dollar’s value, but the currency rose after yesterday's announcement, finishing the day at $US1.045. ‘People are speculating we are nearing the end of the easing cycle,’ said Matthew Johnson, a UBS interest rate strategist. ‘The Reserve Bank is uncomfortable about further cuts and will only make them if they absolutely have to.’”

When it comes to the banks, Fairfax’s Peter Martin says they’ve got plenty of room to pass on the full amount, according to stats from the RBA.

"Each of them sat on its hands on Tuesday rather than immediately responding as they used to, leaving it to the smaller Bank of Queensland, which passed on 0.20 points and ING Direct, which passed on the full 0.25 points. The Prime Minister, Julia Gillard, the Treasurer, Wayne Swan, and the shadow treasurer, Joe Hockey, implored the banks to pass on the full amount, although Mr Hockey qualified his appeal by saying that if they did not they should explain to their customers why they had not. The Reserve calculations show the banks in a better cost position than they were in October when the Commonwealth, ANZ and National Australia banks passed on only 0.20 points of its 0.25 point cut and Westpac only 0.18 points. The governor, Glenn Stevens, said in a statement that Australian banks had ‘no difficulty accessing funding, including on an unsecured basis’.”

The Australian’s Richard Gluyas suggest that the situation isn’t as clean-cut as Martin writes.

"Last month, the Reserve Bank controversially left official rates unchanged, failing to provide the cover for a covert move by the majors to preserve their margin by holding on to part of a rate cut. This month, it will be impossible for the banks to resist the temptation that was denied them last time. If there was ever any doubt about that, it was dispelled by an Australian Bankers Association statement on Monday that flagged a potential cut by the RBA but warned borrowers that this didn’t mean ‘the Reserve Bank expects banks to follow’. It's the same argument the industry has advanced for years: that lending rates have been decoupled from official rates. The counter-argument is that the majors implement de facto rate rises because they can, reflecting the kind of market power that other companies desperate to pass on higher input costs to customers can only dream of. The strength of the banking industry's position varies according to the state of the markets.”

Related to this issue is the fact that not all Australians own a mortgage and interest rate cuts aren’t good news for everyone, a point made by The Australian’s Judith Sloan.

"One of the problems for the Reserve Bank at this stage is that cutting the cash rate may be the equivalent of pushing on a piece of string. To be sure, the 40 per cent of the population with mortgages will welcome the cut. We should also anticipate a fall in business interest costs. But there is a sizeable chunk of the population without debt and who rely, at least in part, on earnings from interest. We have seen the rates on offer from term deposits fall significantly this year. The spending patterns of this group are likely to be affected by this trend.

So how about that Australian dollar? Spiking on a rate cut, what a scallywag. Business Spectator’s Stephen Bartholomeusz says this should be a big concern for the RBA and Treasurer Wayne Swan.

"The pressure on the rest of the economy created by the resource boom may be abating but the strength of the dollar, buoyed by central bank buying and a continuing (if reducing) positive spread relative to other sovereign yields, is muffling the benefits from the investments that were made, under-mining the investment cases for projects yet to be green-lighted and continuing to hollow out the non-resource side of the economy.”

The Australian’s Bryan Frith understands that ADM didn’t contact GrainCorp before announcing its latest proposal for the grains handler. The Australian Financial Review’s Matthew Stevens also has a good point to make on the GrainCorp-ADM power battle.

"The fact is, for all the GrainCorp story of growth and a gathering evolution away from its traditional dependence on the ruthlessly cyclical grains storage and handling game, ADM has twice now exposed some surprising liquidity in its Australian target’s register.”

Had the Reserve Bank’s cut not been the story of the morning for commentators, Fairfax’s Adele Ferguson would have been a read we’d be pushing from The Distillery. The business columnist tackles the conflict of interest inherent in the relationships auditors share with clients. Hardly a new issue, but her summation of it is exemplary and, thankfully, concise.

And finally, The Australian Financial Review’s Chanticleer columnist Tony Boyd is also on the auditing industry, but from the broader perspective of increasing regulation across nearly all sectors of the economy.

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