THE DISTILLERY: RBA verdict

Jotters question the wisdom of the RBA's latest move, while one backs BHP caution.

Combine the blockbuster GDP figures with the latest jobs report and the Reserve Bank’s interest rate cuts in May and June, totalling 75 basis points, are being brought into serious question. Card-carrying RBA apologists are hard to find this morning as critics explain not just how long it takes for a rate cut to take affect, but how inept the central bank is at forecasting.

The Australian’s economics correspondent Adam Creighton jumps on the RBA’s case this morning, arguing that the central bank shouldn’t have cut at all in May or June.

"The bank's rate cuts from November and December are only now starting to have their full effect, let alone the half percentage point cut last month. Milton Friedman observed, after decades of study, that changes in monetary policy have long and variable lag times, from six months to sometimes over two years. That remains the received wisdom. Friedman thought shifts in policy could aggravate rather than ameliorate the business cycle. Discretionary monetary policy is meant to rein in nascent economic booms and dampen impending recessions. But without special powers of foresight that is very difficult. Economics professor Neville Norman of Melbourne University estimates that of the past 26 decisions of the Reserve Bank since 2006, only four have correctly anticipated the economic cycle.”

Property Observer’s Christopher Joye similarly argues that the Reserve Bank has a lot of explaining to do for its post-November decisions

"Glenn Stevens has repeatedly told the community that the RBA does not believe it can forecast with accuracy over the long-term. He repeatedly pushed the notion that it needed to focus on ‘nowcasting’ in justifying its rate cuts in late 2011. When the RBA got a downward revision to the second quarter inflation data in June 2011 from 0.8 per cent to 0.6 per cent, it used this data point to materially change the stance of monetary policy from restrictive to neutral. But it turned out that this core inflation estimate was wrong: it subsequently got revised back up to an unacceptably high 0.8 per cent.

"As any inflation forecaster knows, you do not get a consistently low inflation rate with real GDP growth of 4.3 per cent per annum, an unemployment rate of 5.1 per cent, and a currency that is stable or declining. In the latest inflation numbers, domestic (or so-called "non-tradeable”) inflation printed at around 3.5 per cent, well above the RBA’s 2-3 per cent per annum target. Australia’s low inflation pulse in late 2011 and early 2012 was being driven mainly by internationally priced goods and services (or so-called tradeables), which were actually falling in value as a result of the temporary currency appreciation. So something important in the RBA’s decision-making changed late last year. It stopped nowcasting and started forecasting.”

While the 50 basis point cut is looking a little excessive now, the definition of ‘nowcasting’ is quite vague. Consider the following three events – could the bank really have discounted these from its previous interest rate decisions:
– The federal government slashed the budget, measurable in billions of dollars, and called as loudly as it could for interest rate relief.
– The banks were making it painfully clear that if the Reserve Bank didn’t offer them a window to fatten their margins, they would increase interest rates.
– Europe was, and still is, looking disastrous and China is unmistakably slowing down more than the Reserve Bank had anticipated.

Plus, as the next two commentators will explain, consumer confidence is in the toilet – which is not in itself consequential, but it’s not great either – and the signals from the big miners does not match the briefly re-energised data.

And as the bulls cheer that the previous quarter’s figures have been revised up, The Age’s economics editor Tim Colebatch warns that this set of numbers are pretty likely to be revised down.

The Sydney Morning Herald’s Jessica Irvine offers her take on the first issue.

"So why do we feel so puny? Consumer confidence remains at near recession levels. Uncertainty about Europe and the global economy is part of the answer. But the real answer lies closer to home. Australia's subdued property market is the missing link between strong growth figures and low consumer confidence. Housing is the reason Australian households have been limping around like wounded deer, despite our rock-solid mining abs of steel. Housing is our Achilles heel. On Tuesday, Stevens acknowledged the weak housing market: ''Housing prices had shown some signs of stabilising around the turn of the year, but have recently declined again. Generally, the housing market remains subdued.'' After falls of about 5 per cent last year, figures from RP Data-Rismark show home prices fell 1.4 per cent last month alone across five capital cities – Sydney, Melbourne, Brisbane, Adelaide and Perth.”

And The Australian’s Barry Fitzgerald makes the case that BHP Billiton chief Marius Kloppers is quite right to be pushing back the miner’s final investment decisions on its proposed headliner projects.

"Take the past 30 days alone. Lower prices for oil, copper and iron ore in that period would wipe about $US2.2 billion ($2.2 billion) from BHP's annual net profit after tax. Falls in those key commodities have actually been much more severe and prolonged than that, as things started turning sour in the back half of last year on Europe's debt woes. Simply, Kloppers does not have the money coming in at the rate it was in February last year when he announced BHP would invest more than $US80 billion in organic growth across five years. That was a response to questions on just what BHP would do with the flood of cash through the front door.”

In a separate piece, Colebatch argues that yesterday’s jobs figures indicated neither boom nor bust. Meanwhile, The Australian’s Judith Sloan acknowledges that the employment numbers are backward looking, but unlike some other commentators over the last few days, Sloan says Treasurer Wayne Swan has good reason to enjoy the moment.

In related economic news, The Australian Financial Review’s Jennifer Hewett points to recent worrying figures from commercial construction and manufacturing.

In industrial relations, The Sydney Morning Herald’s Phillip Coorey reports that the mining sector is coming to the defence of the Gillard government – that’s right – to counter the campaign by the trade unions against 457 visas. Meanwhile, The Australian Financial Review’s Matthew Stevens says there’s been something close to a breakthrough in negotiations between BHP Billiton Mitsubishi Alliance and its unions over new rostering.

In company matters, The Age’s Adele Ferguson picks up on speculation that Suncorp has secured an amazing reinsurance deal with the world’s most famous investor, Warren Buffet.

The Sydney Morning Herald’s Elizabeth Knight goes through the likely scenarios that might play out between Echo Entertainment and Crown. She concludes the most probable is that chairman John Story will survive the onslaught by billionaire James Packer. That is, unless Crown receives approval to boost its stake in Echo to 20 per cent from 10 per cent.

The Australian’s Glenda Korporaal urges the federal government to see reason that they can’t dictate to our national carrier, Qantas Airways, how it conducts its business while their voters brazenly choose foreign carriers with more competitive options.

The Australian’s Bryan Frith says that Brookfield Asset Management could be losing its grip on listed property investor Thakral Holdings, while Fairfax’s Insider columnist Ian McIlwraith finds the debt securities of PaperlinX catching a plane to New York.

In other news, The Age’s Malcolm Maiden says everything is changing in the Australian legal profession as UK law firms snap up local operators. The Australian’s John Durie sits down with Australian Securities & Investments Commission deputy Belinda Gibson, who explains that the corporate regulator is beefing up its attack on insider trading.

And finally, writing in The Australian, Giles Parkinson says the federal government is awaiting news of whether the $1.2 billion Solar Dawn project in Queensland has been able to meet its extended finance deadline.