THE DISTILLERY: Rates roundup

Jotters delve into the Reserve Bank's decision to cut the interest rate, with one predicting another cut this year.

The reason why Reserve Bank commentary is such a goldmine for commentators is there are so many organic angles that emerge from a single, predictable source. There’s the emphasis of the RBA’s policy statement that lends weight to certain economic narratives. There’s the impact of this decision and when the next movement will come. There are the ramifications for ‘interest rate politics’ and the potential clash between the assumptions underlying government economy policy and the RBA’s forecasts.

So, without further ado, have at it commentators!

Fairfax’s Malcolm Maiden argues that the Reserve Bank’s decision to cut the official cash rate to 3.25 per cent, which is just above the GFC-lows, from 3.5 per cent is consistent with the new tone reflecting a "glass half empty” prognosis.

"When the Reserve left its cash rate unchanged for the third consecutive month on September 4, it said that while growth in Europe was contracting and growth in the United States was modest, growth in China had been ‘reasonably robust’ in the first half of the year. It said much the same about the US and Europe yesterday, but said that growth in China had slowed and that uncertainty about China's near-term prospects had grown, dampening the growth outlook across Asia.”

The Australian’s economics correspondent Adam Creighton says the RBA has effectively called the end of the resources boom for sometime next year, as China’s enduring uncertainty forces miners to put off proposed projects.

The Australian’s Glenda Korporaal hits an identical theme with here comparison of the RBA’s latest statement to comments from Stevens earlier this year.

"Back in February, when he was appearing before the House of Representatives' standing committee on economics, Stevens talked about Australia's high terms of trade ‘and the resulting investment boom’. That boom, he noted then, ‘is still building and will take the share of business investment in (gross domestic product) to its highest level for 50 years’. Yesterday's statement paints a very different picture and confirms a downward reassessment by the RBA of the expected investment boom in the mining sector.”

Business Spectator’s Robert Gottliebsen writes that the Reserve Bank would have been irresponsible not to cut interest rates because of what he calls our "double dose” of Dutch Disease.

"Australia is being hit hard by the conventional Dutch disease. Our double dose is caused by the sudden decline in our natural resource prices which is not causing a fall in the currency as would normally happen. As a result our miners are also being affected by the Dutch Disease – hence the double dose. Lower interest rates will help lower the currency but the LNG and other mineral construction contracts are so big that money will keep following in for a year or two so artificially boosting the currency.”

So where to from here?

Fairfax’s Michael Pascoe notes the RBA’s warning that moderate labour market conditions and productivity improvements will be needed to contain inflation as the impact of the Australian dollar eases.

"In other words, the RBA might be pouring some more punch, but you wouldn’t want to expect a wild party. The RBA is very careful with its choice of words, which is why you shouldn’t get your hopes up about lower rates significantly weakening the Australian dollar. Note that the inflation warning was about the effects of "the earlier exchange rate appreciation” waning, not about the exchange rate depreciating. There is a considerable difference. The prices of traded goods fell as our dollar rose, but the anti-inflationary impact ceases when the dollar remains stable. If the exchange rate starts falling, then the impact becomes inflationary. This statement only suggests the Aussie will hold, not fall.”

As far as future rates movements are concerned, The Australian Financial Review’s economics editor Alan Mitchell delivers a rather direct commentary this morning, the main conclusion of which is another cut is probably coming before the year is out.

Now we’ve all come to learn that rate cuts are always good in politics-world and rises are always bad. But the Reserve Bank also acts as a crucial economic authority that is used by the government of the day to sell their economic message. It’s a point picked up on by The Australian’s economics correspondent David Uren.

"Like Lord Nelson sailing into the battle of Trafalgar, Wayne Swan has put the telescope to his blind eye and, seeing no trouble ahead, is pressing onwards in his mission to return the budget to surplus.”

Ouch! Uren doesn’t spell out in piece what the battle of Trafalgar is in this analogy. After all, Nelson went on to win the battle – in fact, he totally kicked arse – but Uren might be implying that Swan hasn’t spotted the economic crunch that’s coming.

Uren goes on in a separate piece to raise the spectre of Paul Samuelson, who made the prediction in 1980 that that of the Soviet Union would supersede the US economy.

"The idea that the US faced eclipse by its Soviet adversary was common through the 1950s and 60s, although Samuelson clung to it longer than most. The Soviet state could marshal the resources to drive rapid investment, bringing economic growth rates approaching 10 per cent through the first two post-war decades. It was hailed as ‘an economic miracle’. The obvious parallel is China, where hyperbole over the power of its compound growth has captured official thinking. Wayne Swan says the speed of Asia's transformation is staggering, noting at the recent Treasury and Reserve Bank conference on the rise of Asia that China had doubled its gross domestic product in a decade, one-fifth of the time it took Britain during the Industrial Revolution. ‘By early next decade, the economies of China and India alone are expected to be larger than all the major advanced economies combined,’ Swan said.”

And The Australian’s Judith Sloan has a delightful play with the phrase "a little more accommodative”. We should have a debate about what the financial industry’s most ridiculous turn of phrase is.

Without the Reserve Bank’s decision yesterday, The Distillery’s lead would undoubtedly have been the victory of Fortescue Metals Group founder Andrew Forrest over the Australian Securities and Investments Commission yesterday.

There were always two facets to this story. The first is ASIC’s reputation as a regulator, given the organisation’s already poor record in the courtrooms. The second is the uncertainty the case has created for the continuous disclosure obligations for company directors. It was hoped the High Court decision might provide some certainty.

On the first point, this paragraph from The Australian Financial Review’s Matthew Stevens should leave readers in no doubt about how the ASIC is faring this morning.

"The High Court first found ASIC’s case to be a "forest of forensic contingencies” that created "hundreds, if not thousands, of alternative and cumulative combinations of allegations” that worked to potentially undermine an accused’s rights to a fair trial.

The Australian’s Andrew Main says the corporate regulator will have to "recast” its push against what it believes are the ingredients to a misleading statement from a company director. With this in mind, The Australian Financial Review’s Jennifer Hewett writes that it’s fortunate that ASIC chairman Greg Medcraft is less keen to go to court than his predecessor.

The definitive source on the continuous disclosure issue, and the surrounding uncertainty, this morning is The Australian Financial Review’s Chanticleer columnist Tony Boyd.

"Getting clarity on continuous disclosure obligations will take some time. A guidance note is due to be released in the next couple of weeks by the Australia Securities Exchange. It will be in draft form and be open to public submissions. Continuous disclosure obligations derive from ASX listing rule 3.1 which has the force of law because it is embedded in the Corporations Act. But guidance is needed on how to interpret the language in that listing rule. The meaning of words such as ‘immediately’ and ‘aware’ and ‘materiality’ are not well understood or have been interpreted to suit the purposes of those who prefer to act without alacrity. If the guidance note process works well, and it has over the past 18 months, there will no longer be liberal interpretations of key words which determine market disclosure. ASX was planning to release guidance note 8 in July but was asked by the Australian Securities and Investments Commission to hold off until after the High Court decision.”

Indeed, The Australian’s Richard Gluyas concludes that we’re "none the wiser” when it comes to continuous disclosure and misleading an deceptive conduct.

"The reason is that the High Court determined the Forrest case on a narrow set of facts, without reference to some of the wider, burning legal issues. The view in the legal fraternity yesterday was that the case had little, if any, wider application.”

And finally, let’s not forget Fairfax’s Ross Gittins, who begins a fascinating discussion about economic rationalism and the nature of political self-interest.

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