Two broad global events in the last few months have tugged at the Reserve Bank from two different directions. On the one hand the fall in iron ore prices and the static response from the Australian dollar has given our central bank a clear case for a rate cut. However, the bulls are receiving substantial support by way of "whatever it takes” signals from the European Central Bank and QE3 from the US Federal Reserve.
This morning a pair of commentators offer the compelling narratives pushing the Reserve Bank for a cut and a status quo decision tomorrow. We also have a timely warning about what to expect from rate cuts on two key measures – lending to households and business. Additionally, one of the stories frequently injected into the atmosphere of rate cycles is department store spending. Fairfax’s Clancy Yeates has a brilliant piece explaining how their woes go beyond consumer confidence.
But first, The Australian Financial Review’s David Bassanese says the Reserve Bank should cut interest rates on the basis that iron ore export prices, our largest single export, have crashed without a significant decline at all in the Australian dollar.
"Of course, should the RBA cut interest rates this week, it won’t be in an attempt to bring the dollar down. The RBA cannot and should not try to target a particular level for the currency. All the RBA can do is concede that the combination of weaker export prices and a still firm currency has created additional challenges for the economy, and argue in the direction of lower interest rates as compensation. The weakness in iron ore prices is indicative of a broader malaise in the global economy. Although China’s economy has slowed, its political leaders are preoccupied with a once-in-a-decade power transition.”
But international events are also encouraging the Reserve Bank to stay put, as Fairfax’s Malcolm Maiden explains.
"What traders want is not always what they get, however. The Reserve's board is inclined to cut and may well do so when it meets on Tuesday, but there have been major developments outside Australia since it last met, on September 4. On September 6, European Central Bank president Mario Draghi announced details of his ‘do what it takes’ plan for the ECB to stand in the market for Spanish and Italian government bonds, and drive yields down if they rise to a point that threatens a sovereign debt meltdown. A few days before the Reserve's September meeting, US Federal Reserve chairman Ben Bernanke also said a third round of quantitative easing, or QE, was coming, and on September 13 he announced that QE3 would, in fact, be QE Infinity.”
The Australian’s economic editor David Uren says an interest rate cut tomorrow would be unlikely to remedy the deterioration in credit growth rates, which have continued to fall after the cuts in May and June.
"Both households and business are focused on improving their balance sheets in the face of global uncertainty and subdued markets for assets. So too are the banks. Reserve Bank analysis shows the economy has made good the five years since the global financial crisis to greatly strengthen its resilience. Unlike the rest of the advanced world, where deleveraging is also in full swing, it is occurring in Australia without causing disruption to growth or leading to higher unemployment.”
The Distillery also reminds readers to remember that the banks mightn’t pass on the entire rate cut from the Reserve Bank, which would reduce the stimulatory impact of a reduction further.
Given the signals from the ECB and the Fed, it will be interesting to see whether there are some good commentaries on the fluctuations in international funding rates for the banks.
Meanwhile, Fairfax’s Clancy Yeates says there’s a disconnect between the consumer confidence crisis that our department stores blame for their poor results and the long queue of international retailers, which includes Spain’s Zara and the UK’s Topshop, that are entering the Australian market.
"No, the string of poor results from the department stores – or the heavily discounted sale of Dick Smith Electronics last week – points to deeper problems than consumer caution. Instead, the grim situation facing the department stores has the hallmarks of a catchphrase that we’re hearing a lot of these days: ‘structural change’. Structural change refers to deep-seated shifts in the economic environment. Manufacturers are grappling with structural change caused by Asia’s rise, which has boosted our dollar. Retailers face their own distinctive set of structural changes. And just as structural change is painful for the manufacturers being squeezed by currency, so it is for the retailers. Department stores are especially vulnerable – the sector’s 10 per cent fall in sales during July was the biggest monthly drop in seven years. To understand why things are so hard for DJs and Myer, it’s worth considering what made them successful in the first place.”
It’s a terrific piece, well worth reading in its entirety.
Elsewhere, Fairfax’s Eric Johnston writes that ANZ Bank and National Australia Bank are still pushing for a larger share of the mortgage market as their larger rivals ease up.
Fairfax’s Damien Murphy and Colin Kruger have a great feature on Channel Nine, which points out the poignancy of the success the network has had with special series Howzat! Kerry Packer’s War, a reminder of the glory days that the network can only dream of with bankruptcy looming.
The Australian’s John Durie reports that the Future Fund is considering taking a stake in Port Botany via a consortium bid.
Business Spectator’s Shane White delivers a typically amusing take on last week’s events in his column The Last Gasp. One of the best lines of the column is White’s take on the decision by lenders to move on Australia’s most famous timber company: "Gunns sources were scathing of the banks, accusing them of really leaving the company stripped and cut off at the base.”
And finally, The Australian Financial Review’s Karen Maley writes that the deeper the eurozone recession goes, the greater the divide will become between Germany and France.
It’s a timely reminder that the "whatever it takes” rhetoric is less a cushion for a continent in great economic peril (as this policy is being portrayed in some corners) but more an act of cauterisation for a eurozone that will not recover for many more years regardless of what policy is adopted.