The Distillery: RBA’s rubber scissors

Jotters broadly agree that rate cuts don’t pack the same punch they used to, with one saying poor policy has left the Reserve to pick up the slack.

The Reserve Bank of Australia has reduced interest rates to record lows for borrowers (any deposits, by the way?). The reason for its decision is that inflation is in check… and the economy is sliding into mediocrity. This morning, Australia’s business commentators reflect on the position of the Reserve Bank’s cash rate and where in the hell we could go from here.

Fairfax’s Malcolm Maiden observes that since interest rates began falling from 4.75 per cent in November 2011, the average variable home loan, small business and deposit rates have slid significantly and will fall further.

“The S&P/ASX 200 Index is currently trading at an average dividend yield of 4.8 per cent, for example. Are the rate cuts the Reserve has engineered, and the reduction in the value of the Australian dollar they have helped induce, enough to get the non-mining economy moving fast enough to close the growth gap a slowing resources investment boom creates? Unclear, but the Reserve’s capacity to respond is not. The government and the Coalition are both marketing fiscal strategies that are at best neutral for economic growth in the medium term, and possibly slightly negative. That puts the weight on the Reserve Bank, and it can bear it.”

The Australian’s economics correspondent Adam Creighton says the Reserve Bank cuts simply don’t pack the same punch that they used to.

“The jump in the saving rate from zero to 10 per cent of disposable income in the past decade, and the increase in the share of households’ financial assets in deposits by a quarter to 25 per cent since 2008, indicate lower interest rates are becoming both less potent and politically less attractive. Close to 40 per cent of Australians say deposits are the wisest place to save, more than double the proportion who said so before the global financial crisis. Households, which have maintained on average since 2008 a debt to assets ratio of 150 per cent – one of the highest in the world – don’t appear to want to borrow more.”

The Herald Sun’s Terry McCrann simply ain’t impressed by lower interest rates for borrowers when it’s basically due to the hurt being felt by the broader economy.

There is one reason, and one reason only, the Reserve Bank cut its official interest rate. The economy is weak. The major reason the economy is weak is the dreadful state of business confidence. Businesses, big and small, have been reluctant to hire and have been reluctant to expand. That is a direct consequence of two things that can be sheeted home right to the door of the prime minister. Both the door of the former prime minister Julia Gillard and her predecessor and successor Kevin Rudd. The first was the decision to announce the September election date at the start of the year. That turned virtually the entire year into a drawn out election campaign.”

In a similar vein, Business Spectator’s Stephen Bartholomeusz notes that falling interest rates have done nothing to significantly improve weak business and consumer confidence or generate investment or growth in the non-resources economy.

“It might have put a floor under house prices, which are rising, and pushed rate-sensitive investors toward high-risk sources of yield, but it is questionable whether those are particularly productive outcomes. It is also the case that, while households are saving more and borrowing less, savers are being punished for their prudence with the benefits of lower rates flowing to borrowers. National Australia Bank and Bank of Queensland passed on the latest cut immediately. For those households struggling with the cost-of-living pressures which Kevin Rudd was referring to when he criticised Joe Hockey yesterday there are others, particularly retirees, who are seeing their incomes dwindling.”

The Australian’s Judith Sloan also observes that falling interest rates aren’t actually good for many people.

“What will be the impact of the lower cash rate? The first thing to note is that lower interest rates are in fact bad news for many members of the community. About one half of home owners do not have a mortgage. And many retired persons rely on interest payments from fixed-term deposits to fund, in total or in part, their daily living expenses. There is also the issue of how sensitive the non-mining sector is to changes in the cash rate, particularly at these low levels.”

The Australian’s John Durie spots the thinking behind Westpac Bank chief Gail Kelly’s decision to cut interest rates by more than 25 basis points.

“Westpac’s Kelly has long maintained headline rates well above her peers and, in the six months ended June, grew mortgages by just 1.9 per cent against 3 per cent for the market. But at her last profit report in March she signalled a move back into full competition. She has argued there is not a lot to lose by maintaining higher rates for longer and boosting bank profits, given the overall market is so weak. But clearly if the market starts to heat up then Kelly wants to be in the game, which explains yesterday’s move.”

Speaking of the banks, The Australian Financial Review’s Chanticleer columnist Tony Boyd picks up on some research from National Institute of Economic and Industry Research director Peter Brain with modelling showing one of the big four banks will be almost irrelevant by 2025.

“Brain says the big threats to Australia’s banks are companies such as PayPal, Google, Apple and Samsung. Others have argued that there is a bigger threat to Australian banks from the technology giants in China including AliPay, Alibaba, Renren and Baidu. Brain says the impending rise in competition and shifts in technology will place immense pressure on fees and interest margins. Brain’s modelling assumes real fee income generated by banks will decline by 3.8 per cent a year on average, from now until 2025. The modelling assumes net interest income will decline by 4.7 per cent a year, bringing Australian banking back from having some of the highest interest rate spreads in the world and more toward global norms.”

In other news, Fairfax’s Adele Ferguson says evidence for the Reserve Bank’s motivation for cutting interest rates can be found in the latest pain from Downer EDI on the back of sliding mining industry revenue.

The Australian Financial Review’s Matthew Stevens takes the industrial relations framework established by the Labor government to task by using the case of the wages being leveraged by the Maritime Union of Australia for offshore marine sector workers. It’s an area of the economy that has a significant bottleneck.

The Australian Financial Review’s economics editor Alan Mitchell holds Opposition leader Tony Abbott to account on his claim that Labor has instituted three new taxes in three weeks.

And finally, Fairfax’s Ross Gittins faces the obvious truth that election campaign promises are doomed to be broken.

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