THE DISTILLERY: Rates reckoning

Commentators weigh up the likelihood of a rate cut, while others are united in criticism of the Perpetual board.

Before the big four banks started softening up the market for an out-of-cycle interest rate rise without an unfolding global financial crisis to point to, business commentators could only speculate on what the Reserve Bank was going to do each month. In this morning’s Distillery, there’s still plenty of room for that, with The Sydney Morning Herald’s Ian Verrender arguing a cut is probably needed if for no other reason than to take some heat out of the Australian dollar. But now the discussion isn’t so much about what our central bank does, but what our centralised banks do. Elsewhere, a number of business writers are in agreement that the Perpetual board has been a perpetual disappointment of late and needs serious renewal.

But first, The Sydney Morning Herald’s Ian Verrender says the Reserve Bank of Australia will be torn about whether to stimulate or conserve its interest rate reserves, but the Australian dollar should be a crucial factor.

"Everyone wants a slice of the action. And who can blame them? Borrow euro, buy Aussie. It's a no-brainer. Add to the equation the fundamental reason our dollar is strong – the vast inflow of investment funds to build and expand new resource projects coupled with record shipments of raw materials – and reining in the Aussie will be no easy task. But narrowing that interest rate differential with Europe, the US – and by association China – and Japan may go some way to achieving it.”

Meanwhile, The Age’s Tim Colebatch makes the good point that banks might be grappling with higher overseas funding costs, but the majority of their funding comes from domestic deposits. And what has happened to the rates the banks pay on those, the writer wonders?

"In the six months to last month, the Reserve Bank reports, the average rate the banks paid on term deposits fell from 4.5 to 4.2 per cent. The average rate paid on ‘special’ deposits fell from 6 per cent to 5.35 per cent. The banks also cut the rates they paid on cash management accounts, bonus savings accounts, and online savings accounts. Their funding costs have risen? Show us the evidence. As Reserve deputy governor Ric Battellino pointed out in December, the banks in fact reduced their market borrowings in 2011; their deposits rose by more than their lending. It adds up to a very weak case for the banks to make off with the relief the Reserve wants to give to those who actually need it.”

Then again, The Australian’s Jennifer Hewett says the banks shouldn’t be criticised so savagely for not wanting to pass on an entire interest rate cut from the RBA.

"It's not hard to understand the banks' reluctance. According to UBS research, banks have been losing money on new mortgages for the past four months because the marginal cost exceeds the marginal revenue. The rates being paid for deposits may have come down somewhat, but they are still much higher than they were before the financial crisis made it obvious there were drawbacks to debt. The cost of funding on the wholesale markets is high and getting higher as banks roll over their billions of borrowings on less favourable rates. That impact on the bottom line is compounded by the great deleveraging going on in Australia as well as the rest of the world, with people and businesses keen to pay down debt rather than borrowing."

And fourthly in this morning’s Distillery, The Australian’s Richard Gluyas says the next step for Perpetual, now that chief executive Chris Ryan has been booted, is to renew the board.

"For such a stalwart brand (it is the nation's biggest wealth manager not owned by a major bank or life office) with long-term investment outperformance over almost any time horizon, the company should be doing much better than it is. Since the financial crisis, it has failed to leverage its brand strength into net flows, with the situation compounded by the size of the back book and the reality that many contributors are switching from accumulation to drawdown. Lloyd was not kidding yesterday when he said he had to reinvigorate sales and distribution across the entire business.”

Staying with Perpetual for the other business commentaries this morning, there’s universal agreement on the need for board renewal. The Australian’s John Durie is particularly scathing. And The Age’s Adele Ferguson says the fact that departed Perpetual chief executive Chris Ryan was replaced so quickly after a blow up with the board suggests that his position has been in question for some time. The Australian Financial Review’s Chanticleer columnist Tony Boyd says Perpetual continues to carry the corporate costs of a company with a market cap of $5 billion.

On the question of whether rates should go up or down, an economist under the pen name Henry Thornton (an English economist from the late 18th century) delivers an article in The Australian demonstrating how finely balanced the arguments for and against a rate cut are. Thornton tentatively argues for rates to be left on hold for now. The Australian’s David Uren says Treasurer Wayne Swan’s rhetoric towards the big four banks has steadily deteriorated.

Meanwhile, The Age’s Michael West talks to Asian markets specialist Kerry Series about the trajectory of the Australian dollar, given its correlation with Asian sharemarkets – they’re looking upwards.

In company news, West finds in a separate piece that Fortescue Metals Group shares jumped on speculation that Hong Kong’s Noble Group has picked up a strategic stake. The Sydney Morning Herald’s Malcolm Maiden says Spotless Group chairman Peter Smedley has conceded a little, but not all of his ground, to Pacific Equity Partners, while The Australian’s Criterion columnist Tim Boreham writes that Quickflix has landed itself a big fish, albeit with a small investment, in the form of Home Box Office.

Fairfax’s Insider columnist Ian McIlwraith looks at Australia’s listed investment groups, managing an estimated $16 billion, and the amount that they simply invest in each other. The Australian’s Bryan Frith finds the NSW government with a useful solution for Reliance Rail.

And finally, Fairfax’s Peter Cai finds global leaders – particularly European – being reduced to mere peddlers of bonds when it comes to China.