Choice rates high on RBA list

WHEN Ian Macfarlane sits down with his Reserve Bank colleagues on August 5 to set interest rate policy it will be one of the bigger calls of his illustrious career.

Until recently it seemed a dead certainty that rates would begin to be lifted from 4.75 per cent to 5.5 per cent in a series of steps. Now the RBA has to factor in the potential effect of the global stock market nosedive on the Australian economy.

History provides some guidance. Alan Bond floated out of the 1987 crash on a tidal wave of beer – although the house of cards erected by Christopher Skase collapsed almost immediately. Stock investors got a severe hair cut. But the pain in the real economy was relieved by falling interest rates and fast and loose bank lending. That climate led directly to the 1990-91 recession, because the RBA had to stamp heavily on the brakes. Alan Bond finally went under, and a steep climb in the cost of money sent companies broke left and right.

Mr Macfarlane will not want a replay of that scenario. The problem now is that inflation is bursting through his 3 per cent corsets. The housing boom and consumer spending are not slowing down quickly enough at a time when the rate of new job creation is still reasonable. If the RBA does raise rates in August, it will not have a lot of company. Central banks almost everywhere are too frightened by the fragility in US equity markets. If the RBA does not raise them, it risks a growth break out that might need a brutal monetary squeeze later. Should jittery overseas markets settle down in the coming weeks, that would clear the way for a rise. So, yet another sharp drop on Wall Street might be just the job to postpone hikes in mortgage rates. Of course a further wave of panic selling would be bound to impact on Australian share investors and gnaw further holes in our superannuation savings. Some choice

Who’s governing the corporate governors?

WHEN Collingwood Football Club booster Brad Cooper had a logbook stolen from the glove box of his Ferrari, he reportedly called up his old firm, HIH Insurance, and put in a claim for an eyebrow-raising $65,000. Cooper got the money just before the company went bust. The revelations spilling out of the HIH Royal Commission have led to questions over how our public companies are run, and the people who run them. On available evidence the answers are reassuring. Earlier this year, the Standard & Poor’s rating agency mobilised its vast database to examine the standards of corporate governance among the companies that comprise its S&P Asia Pacific 100 index. The criteria included the quality of financial transparency, timely information disclosure, and management structures. The combined findings were scored out of 10. When the numbers were crunched, Australia and Singapore were heavily represented in the top one third for best practices, while those from Taiwan and South Korea were at the opposite end of the scale. For the record, Amcor, AMP and Wespac all scored eights, closely followed by CBA, BHP-Billiton and Boral. Note that the S&P exercise centred on the big companies. There are some bad apples here – but not the orchards they have in the US.

High standards of transparency in earnings reports have a material effect on the ability to raise capital and at what cost. It is a matter of self-interest. A few Australian companies have failed the test and gone to the wall. No amount of legislation or regulation will remove risk for equity investors. But there is nothing like a market downturn to bring sleepy watchdogs bounding from their kennels.

Unfortunately, they are now snarling at each other. ASIC chairman David Knot has growled that the Australian Stock Exchange is not paying attention to best corporate governance. He hinted that his agency might be obliged to take over responsibility for market supervision from the ASX.

Karen Hamilton, general manager market integrity at the exchange, snapped that its role was restricted to corporate disclosure, not the administration of company law.

This is no time to be fighting for turf. Perhaps a bucket of cold water should be poured over the pair of them.

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