THE DISTILLERY: Reserved forecasts

Jotters disect the latest Reserve Bank minutes, while one predicts a temporary, painful loss of competitiveness for Australia in a high inflation world.

The Reserve Bank of Australia has slashed the cash rate by 125 basis points in 2012. It might be a record low of 3 per cent, but the banks have fattened up their margins to offset rising international funding rates.

Will Governor Glenn Stevens cut another 100 basis points from the cash rate in 2013 bringing actual lending rates to record lows as ANZ Bank chief economist Warren Hogan predicts? Armed with the minutes from the central bank’s last meeting, Australia’s business commentators investigate.

The Australian Financial Review’s economics editor, Alan Mitchell, is probably in the best position of any journalist on the outlook for rates this morning, because his newspaper has an exclusive interview with Stevens. The central question is whether the Reserve Bank can maintain a low inflation policy in a high inflation world, courtesy of the money printing the world over.

"In textbook theory, we should be able to stick to our target at little or no cost. Our dollar should appreciate against the currencies of the more rapidly inflating major economies, but their producers should be losing competitiveness because of their higher inflation and costs. The two should cancel each other out. In practice, however, things might not work out so neatly. Our exchange rate might appreciate well before the higher inflation of our trading partners translates into their more rapidly rising wages and a loss of competitiveness. Australia could suffer a temporary but painful loss of competitiveness. Would it be worth the price? Stevens certainly thinks it would.”

Fairfax’s Michael Pascoe addresses Hogan’s forecast directly, arguing that the latest musings from the Reserve Bank don’t support the ANZ banker’s view.

"The overall tone of the RBA’s December meeting remains a little dovish, but a slight upturn in the global outlook, concern about inflation and faith in the eventual impact of the rate cuts already made point to a central bank in no hurry to do a lot more. It would take a much grimmer reading of the global and domestic economy to suggest the RBA is contemplating drastic action when ‘Some of the expected effects (of interest rates being below average) were starting to be observed and further effects could be anticipated over time.’”

The Distillery urges readers to remember that the RBA hasn’t always published its minutes. This practice began in 2007, which for all intents and purposes is fairly recent.

Imagine if this had always been standard practice for the RBA. Would previous statements on a cusp of a 12-month period that ultimately contain 100 basis points even vaguely support that destiny in advance? It’s a point that’s to some extent put to readers this morning by the Herald Sun’s Terry McCrann.

"Since November 2011, the RBA's official rate has been cut 175 points from 4.75 per cent to 3 per cent, the equal lowest it's ever been. Including that first Cup Day cut, there have been 13 RBA monthly meetings over that time-frame. At seven of them the rate was left unchanged; at six it was cut; in five cases by 25 points, at one, in May, by 50 points. When Stevens and the board made that first cut, they would not have the slightest clue that they would 'end up' at the end of 2012 at 3 per cent. They most certainly weren't 'aiming for that destination,' so to speak.”

Fairfax’s Malcolm Maiden takes the statement for what it is. A document that’s two weeks old, detailing a decision based on backward looking data, weighed against somewhat unprecedented domestic conditions and potential international mayhem.

"The international outlook is probably a wash for the moment. Washington will sidestep the fiscal cliff, but quite possibly not until after the holiday break, when the automatic cuts actually create negotiating room. Europe will stumble along, with Spain the real powder keg. Whatever happens overseas, however, events here since the December meeting have kept the central bank on track to continue to pull rates and borrowing costs down: a lousy Christmas for the retailers would add to the urgency.”

Fairfax’s Adele Ferguson has a ripper story this morning on the growing interest from international retailers in the Australian market.

"Besides the advantage of the GST-free threshold on internet purchases, which allows shoppers to buy overseas goods under $1000 in value GST free, the high Australian dollar has effectively made the Australian market at least 20 per cent bigger for these international players. It goes a long way to explaining why British shirt maker T.M. Lewin and competitor Thomas Pink have come here. Another recent arrival is Finnish design store Marimekko and next year Japan's fashion outlet Uniqlo and US homeware group Williams-Sonoma plan to join the trend. Depending on how successful they are, they will take market share and dollars away from Australia's existing retailers.”

The big corporate story from yesterday was Commonwealth Bank of Australia increasing its stake in Aussie Home Loans.

The Australian Financial Review’s Chanticleer columnist Tony Boyd and Business Spectator’s Stephen Bartholomeusz deliver pieces that are quite different in content, but thematically somewhat similar.

Boyd says the Australian Competition and Consumer Commission has a tough task ahead of it assessing whether to informally approve the move because mortgage broking is in consolidation mode and this could seriously impact competition, or at very least the appearance of it. It’s made all the more difficult by the unreliable statistics surrounding industry market share, writes Boyd.

On the flip side, Bartholomeusz says CBA boss Ian Narev, who served as strategy boss during the original Aussie Home Loans deal, would be well aware that the company’s appeal is its perceived independence. The big banks 80 per cent ownership, with the potential to move to 100 per cent, could leave consumer bereft at an apparent lack of choice and competition.

In other company news, The Australian’s Bryan Frith says Billabong International will almost certainly be forced to disclose to the market a conditional proposal to buy it out by director Paul Naude, unless if opts for a trading suspension.

And finally, Fairfax’s Ross Gittins smacks one out of the park with this line about the first conclusion made following the release of the latest GDP data that the economy grew by just 0.5 per cent in the three months to September. That conclusion being that it makes the budget surplus target for the Gillard government harder.

That’s true, says Gittins, but that’s not the point.

"The budget was made to serve the economy, not the other way round. And the economy was made to serve us. So, the primary question to be asked when we get the quarterly report card is what it implies for us. Is our material standard of living improving more slowly than we'd prefer? Is inflation getting worse? Is the economy growing fast enough to stop unemployment rising? It's only because these things matter to us that they also matter to the fortunes of the governments we re-elect or toss out. So, the economic implications of the budget balance come first, the political implications are very much secondary. Trouble is, for both the public and the media, the political implications of the budget balance are deceptively simple, whereas the economic implications are complicated and, to many, incomprehensible.”

Well said sir.

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