THE DISTILLERY: Rates fracas

A rash of interest rates commentary takes on the big banks' reactions, while one jotter tells state governments to step up.

Treasurer Wayne Swan was quick to warn the big four banks to pass on the Reserve Bank’s interest rate cut in full – almost as fast as he claimed credit for the reduction on the government’s behalf. The reality is though that Europe’s increasingly desperate debt crisis means that erring on the side of caution for a central bank in this environment is to cut, not hold. The business commentators point this out in force, along with the sour chaser that many of the big four banks are unlikely to be able to pass on every one of those 25 basis points due to increased wholesale funding costs. Further undermining the government’s enviable economic narrative – by developed world standards – The Age’s Adele Ferguson finds that the federal government is squandering a ‘Steve Bradbury’-style moment to attract willing international infrastructure dollars and says it’s up to the states to sort it out, while The Australian’s Peter van Onselen finds Australia’s already poor reputation as a place to do business is slipping even further.

Firstly, Adele Ferguson is urging our state governments to take advantage of a once-in-a-generation synergy of factors that have made mature Australian infrastructure assets some of the most sought after in the world.

"The global interest in mature infrastructure assets in a relatively stable economy with an exposure to China and India can't be underestimated. It explains why global pension funds in dire need of stable returns are keen to get an exposure to Australia at a time when the euro zone continues to teeter… State governments cannot rely on the federal government for infrastructure funding. For the past three years Infrastructure Australia, the independent body set up by the Rudd government in 2008 to help end the nation's infrastructure nightmare, has put out a priority list of projects with nothing moving off it. It means if the states want anything done, they are going to have to do it themselves, and given most are battling deficits, the most logical answer is to offload mature assets to help bankroll projects.”

But, as The Australian’s contributing editor Peter van Onselen explains, Australia’s attractiveness as a destination for big investments could be attributed to something just above dumb luck. Van Onselen points to Australia’s slide down the World Bank’s ranking for places to do business from a surprisingly bad 60th to an even more embarrassing 65th.

"This puts us alongside countries such as Turkey and Paraguay. For context, our biggest trading partner, the US, is ranked ninth. Our closest ally culturally and geographically, New Zealand, tops the list… When you consider the sovereign risks attached to constant changes in the design of the mining tax, the uncertainty surrounding what will happen with carbon pricing (partly the fault of the opposition, which is pledging to repeal it), and plain packaging legislation which tramples over the trademarks of tobacco companies, Australia is becoming an increasingly risky place to do business.”

While the government’s economic management is all too often seen by the electorate through the prism of interest rates, The Sydney Morning Herald’s Elizabeth Knight points out there’s almost no chance that all the banks will be able to pass the full rate cut on to borrowers. Knight also offers an inside word on one of the major banks (that’s not NAB) passing on the full 25 basis points, while noticing that Commonwealth Bank and Westpac aren’t running their usual race to update their interest rates first.

"Instead the Sydney-based pillars are waiting to see the response from the weakest link – the National Australia Bank. It has grown most in market share at lower margin rates and is therefore under more pressure to pass on less than the RBA's 25 basis point cut. Yesterday afternoon one of the majors had penned an announcement that it would move the full 25 basis points but was hanging back to allow NAB to sweat a bit. All would dearly love to restore some margin by not passing on the full rate cut but recognise the political and consumer backlash will sting.”

Meanwhile, The Australian’s Matthew Stevens takes a step back from what the major banks will do, and remembers that this is new Commonwealth Bank of Australia boss Ian Narev’s first week in the job.

"To appreciate the storm that would be triggered by a move to protect margins, Narev need only pick up the phone and have a quick chat to his immediate predecessor, Ralph Norris. It was Norris who just 13 months ago refused to pass on all of an official cut, and the community and political opprobrium that decision attracted might well have shaken the resilience of a less sturdy and firmly established individual.”

Staying with interest rates to round out the rest of the morning’s commentaries, the Herald Sun’s Terry McCrann says the RBA didn’t cut interest rates to prevent a European meltdown spilling into Australia – that’d require bigger cuts – or as a response to federal budget cuts. The Reserve Bank moved because it could and to prevent an out of cycle rate increase by the banks. The Sydney Morning Herald’s Michael Pascoe strikes a very similar tone, while The Australian’s Judith Sloan reveals she’s always put interest rate predictions in the same compartment as footy tipping; the same arguments are not very reliable from week to week – or month to month in this case.

The fact that the big four banks are just as concerned about the situation in Europe as the Reserve Bank because it’s hurting their margins and their ability to pass on all 25 basis points is picked up by The Age’s Adele Ferguson in a separate piece, as well as by John Durie and Jennifer Hewett from The Australian. The Australian’s economics correspondent, David Uren, notices the distinct change in tone from the Reserve Bank from its last interest rate decision – surprise at lower-than-expected inflation figures has been replaced with commentary on Europe and little else.

And finally, The Australian Financial Review’s Chanticleer columnist, Michael Smith, says retailers will have to measure the boost to consumer confidence from the rate cut in time for Christmas against the "triple-Grinch” of foreign competitors, online competitors and higher savings rates.

Meanwhile, The Australian’s Bryan Frith offers the definitive explanation of why the Australian Competition and Consumer Commission would not take its objections on the Franklins/Metcash decision to the High Court. The High Court will only hear cases that have a chance of being overturned and given that the Federal Court comprehensively dismissed any chance of that and the consumer watchdog is only seeking clarification on some merger principles, it will require a less certain encounter between the ACCC and a company.

Over at The Australian Financial Review, economics editor Alan Mitchell says the government has one option available to it to stem the decline of the manufacturing industry – population growth. Meanwhile, his counterpart at The Sydney Morning Herald, Ross Gittins, hails a man he believes is a genius, Michael Shutler, for his latest efforts to reconcile the increasingly impersonal nature of capitalism with its participants, people, which are social animals.

Fairfax’s Ruth Williams spots efforts from the federal government to make annual meetings more interesting and relevant to shareholders – a worthwhile enterprise. The same publisher’s Garimpeiro columnist, Barry Fitzgerald, takes another look at BHP Billiton’s move into shale gas, with recent acquisition Petrohawk stepping up developments in the face of slumping prices. And finally, The Australian’s Criterion columnist, Tim Boreham, provides the definition of a bad day through Shaw River Manganese, which became the subject of a massive damages claim without being aware of it.