THE DISTILLERY: Rates overreach

Commentators are wrapped in intense interest rate speculation, but one shows the drama is overdone.

Reserve Bank governor Glenn Stevens will probably grapple with two feelings at today’s board meeting – frustration and relief. He’ll be frustrated that the interest rate decision is heavily influenced by choices made by European policymakers, who stand atop a poorly managed economy with a darkening outlook; and in any case many of their choices have yet to be made. But by the same token, he’ll be relieved that he sits atop a well-managed economy with a bright future. The Herald Sun’s Terry McCrann has the perspective to drag his readers out of the dire European narratives to show how the attention on this interest rate decision is being overdone. Another business writer to some extent adds to this point by demonstrating just how little the Australian economy needs a rate cut if viewed in isolation. But it’s not all interest rate speculation this morning, with one business columnist following MAp boss Kerrie Mather and her quest to reshape Australia’s busiest airport.

But, inevitably, we start with the most astute Reserve Bank observer, the Herald Sun’s Terry McCrann. The veteran interest rate watcher doesn’t give a definitive prediction about what the Reserve Bank will do today, but with things so finely balanced he encourages Glenn Stevens to err on the side of caution, which means leaving rates unchanged.

"It's simply that it's just not that important whether the RBA leaves the rate unchanged or cuts by 25 points. It never really is at any particular RBA meeting – other than to those, obviously, who are betting on the outcome. But this time the intense 'will they or won't they' focus is even less meaningful. In part, because of what the RBA did last month; but much more because what lies in store through 2012, and indeed, as soon as next week. By cutting last month, it brought the official rate back into the 'neutral zone'. That's to say it's at a level which is not trying to slow the economy nor to boost it.”

The Sydney Morning Herald’s Ian Verrender doesn’t go as far as to suggest the decision isn’t that important, but he does emphasise just how big a factor Europe is in this meeting, by illustrating how appropriate monetary policy is from a domestic perspective.

"Last week, the federal government revised downward its growth prospects for next year and beyond, based on a looming recession in Europe and a slowdown in growth from our major export market, China. But at a projected 3.25 per cent growth per annum this year and next, that's hardly what you'd call cantering along in the slow lane. True, it was cut from a projected 4 per cent this year, a forecast made just a few months back in the federal budget. But the lower growth on its own does not justify an interest rate cut. It merely serves to underscore the correct settings now in place and the appropriateness of the November cut.”

Thirdly, fellow SMH columnist Michael Pascoe makes the point that if Europe does go down in a screaming heap between now and the first Tuesday of February, the Reserve Bank will act – the institution doesn’t go on holiday for two months. He points out that in order for a 25 basis point cut to be an effective response to Europe’s debt woes as they stand, the Reserve Bank would have to believe there’s a possibility of a deterioration in Europe’s prospects over the next two months that isn’t severe enough to justify an unscheduled meeting in January. That’s a small window.

"The main reason given by the rate cut lobby is that Europe is in a bad way and might get much worse. Yes it is and yes it might – but that's actually a good reason to keep your powder dry now. If the global banking system is whacked, the RBA will want to cut hard, fast and often with maximum impact – not in piddling 25-point snips, but in big 100-point slashes, the way it did when the GFC was hitting three years ago. It would be silly to waste some of your precious ammunition now to assuage the whingeing of a few retailers who are having trouble restructuring.”

Thankfully, it’s not all about interest rates in this morning’s Distillery. The Australian’s John Durie overcomes the trend to report that MAp chief executive Kerrie Mather has got a good plan in place to keep a second Sydney airport on the agenda in order to maintain her organisation’s infrastructure monopoly.

"Mather's plan is to have Qantas and its partners create a hub around what is now the domestic terminals. Virgin and its partners will settle around the international terminal and a new engineering base will be established. When you are a monopoly infrastructure supplier, it's smart to emphasise the pro-competition impact of your development. That is exactly what Mather did, arguing it would underline the partnerships Virgin is building around the world with global airlines, which account for some 30 per cent of international traffic into Sydney.”

Staying with MAp for the rest of this morning’s commentaries, The Australian Financial Review’s Chanticleer columnist Tony Boyd says that while Mather’s plan works in theory, she’s still short a feasibility study, a detailed costing report and binding agreements from the airlines. Meanwhile, Fairfax’s Matt O’Sullivan describes how Mather’s shift to consolidating the terminals at Sydney Airport amounts to something of a full circle for the infrastructure executive.

The Age’s Adele Ferguson suggests that up to $6 billion in late fees across a variety of industries has been called into question after a federal court judge said such late fees could be defined as penalties – making them a breach of contract. Still in the courtroom, The Australian’s Matthew Stevens finds the mining union coming up short at Fair Work Australia in its efforts to protect illicit drug-using workers from more reliable testing methods due to privacy concerns.

Staying with company news, Fairfax’s Insider columnist Ian McIlwraith suspects that CVC Asia Pacific’s Adrian MacKenzie might struggle to get his lenders for Nine Entertainment to refinance the company’s enormous debt, while The Australian’s Criterion columnist Tim Boreham looks at the acquisition credentials of UGL. Also, The Australian’s Damon Kitney finds retiring Toll Holdings boss Paul Little has a not-so-little private business empire that he will devote his attention to when he steps down from the company at the end of the month.

Meanwhile, Fairfax’s Matt Wade finds that billionaires are popping up in Asia at an astonishing rate – another sign of the region’s growing economic might – and they often build their fortunes in family-owned companies.

Turning back to domestic affairs for the last few thoughts this morning, The Australian’s economics correspondent, David Uren, says the Coalition will be hard pressed to match Labor’s tax cuts in the upcoming election without a carbon tax because the steadily increasing pool of corporate taxes that funded its cuts during government has dried up. And finally, national affairs correspondent of the same newspaper, Jennifer Hewett, says preparing for what the European leadership will ultimately decide – which the Reserve Bank must do to some extent – is "more art than science”.