Commentators connect the dots between the 50 bps cut from the Reserve Bank and what the banks will actually pass on, while one reminds us it's the RBA's job to look forward.

Anyone still criticising the Reserve Bank for reducing interest rates by 50 basis points need only wait until the end of next week. By then, the big four banks will have shown how many of those 50 points they plan on holding for themselves and Treasurer Wayne Swan will have slashed billions from the nation’s economy. That’s the broad consensus of the nation’s business commentators this morning, with additional thoughts on how the cuts might affect the fortunes of our property firms and building groups.

Firstly, Business Spectator’s Stephen Bartholomeusz stresses that the Reserve Bank has ongoing dialogues with the major banks and would have been well aware that a 25 basis point reduction yesterday would have resulted in maybe 10 to 15 points being passed on the mortgage holders.

"By opting for a 50 basis point cut the RBA has effectively ensured that it will probably get 35 basis points to flow through to borrowers, which would have a much more significant impact on the psychology of borrowers and their real interest costs. In the process it has practically invited the banks to hang onto some of the reduction. One way to interpret the move would be to say that it indicates some concern by the RBA about the state of the economy but not the kind of fear that drove those percentage point reductions during the worst of the financial crisis. That might change if Wayne Swan actually delivers the $40 billion-plus contraction in the economy implied in his promise to bring the budget back into surplus.”

This is a point picked up on by The Sydney Morning Herald’s Michael Pascoe, who noticed a lack of commentary in the RBA’s statement about the coming fiscal tightening.

"There's a hint there between the lines and there should be more in the quarterly statement on monetary policy on Friday. The immediate key is that the governor specifies the RBA is cutting ‘to support demand’ – not because output growth ‘was somewhat below trend’. And the need to ‘support demand’ is ‘notwithstanding that growth in domestic demand ran at its fastest pace in four years’. It's the RBA's job to look forward in setting monetary policy, not to be a captive of the last quarter's performance in those sectors of the economy that are flat. Thus the unspoken importance of next week's budget and its promise to be a drag on domestic demand.”

As we’re all well aware by now, interest rate politics is about the mortgage belts. So what should we expect for real estate prices? The Sydney Morning Herald’s Elizabeth Knight noticed that just as the RBA was cutting rates, two of Australia’s largest property players were dropping hints.

"Two of the biggest residential housing builders, Stockland and Mirvac, gave a market update yesterday adding detail from their own experience. While neither predicted a boom in the sector, there was some small degree of optimism. Stockland chief executive Matthew Quinn sees the property market as a tale of two demographics. The middle and top end of the market is falling, but at the lower end where these companies operate there is plenty of latent demand. Quinn said that a couple of years ago, based on the traffic through Stockland's display homes, 24 per cent of interested buyers were then renting. Today almost half the potential buyers are renters. Stockland hopes a rate cut will burst this dam… Mirvac sees some good fundamentals in New South Wales because of dwelling shortfalls and strong rental growth. It said Victoria remained soft with volumes and prices easing through 2012. The experience of these developers does not mirror Bureau of Statistics numbers, but reflects the fact that they are operating in a market that supplies residences worth less than $500,000.”

And The Australian Financial Review’s Chanticleer columnist Tony Boyd noticed that Dulux Group chief executive Patrick Houlihan was a quick mover in response to the Reserve Bank’s rate cut.

"Houlihan, like everybody else, would have been planning on a rate cut but not the aggressive 50 basis points cut that took the RBA official cash rate to 3.75 per cent. He quickly grabbed a 19 per cent stake in Alesco and is well placed to win control of a business that should benefit from lower rates. Lower official cash rates mean lower home loan rates, which should mean a kick-along for a housing market that has been characterised by falling prices at the top end, weak demand from new home buyers and softness in key markets in Victoria, Western Australia and Queensland.”

As you’d expect, we’ve got quite a bit more interest rate commentary in this edition of The Distillery. The Australian Financial Review’s economics editor Alan Mitchell makes the brilliant point that cutting interest rates next month, after a fiscal tightening from Canberra, could encourage a dangerous impression that governments can effectively bully the RBA into cutting rates. Hence, the RBA shouldn’t move next month. With eyes still on the horizon, The Australian’s John Durie says ANZ Bank boss Mike Smith can sit out the shenanigans of the other bank rate decisions until Friday week when his bank will make their call. The Australian Financial Review’s Matthew Stevens says similarly that we should be in for an interesting few days.

The Age’s Malcolm Maiden argues yesterday’s budget from the Victorian government is a useful example of why the Reserve Bank had a compelling domestic case to cut by 50 points. However, The Australian’s economics correspondent Adam Creighton reminds readers that the two main drags on the Australian economy – debt-laden consumers and a high Australian dollar – won’t be significantly helped by the rate cut.

Meanwhile, The Australian’s economics editor David Uren asks how Treasury’s forecasts for the Australian economy three years ago could have been so very, very wrong. The Sydney Morning Herald’s Ross Gittins finds a study from the Pew Research Centre reveals him to be more of a European thinker than an American thinker. The research shows a majority of Americans believe individualism is more important than the state making sure no one is left in need, whereas in Europe the reverse is true.

In company news, The Australian’s Bryan Frith says Dulux has been bold in its bid for Alesco, while Fairfax’s Insider columnist Ian McIlwraith takes a look at the accounts of UBS’s Australian arm. And finally, The Australian’s Barry Fitzgerald digs into the shallow history of Kula Gold and the much deeper history of the goldfields it taps in Papua New Guinea. Let’s hope the interest rate commentaries die down for just a day or two.


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