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ANZ boss says Reserve Bank moved to early on -

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ANZ boss says Reserve Bank moved to early on raising rates

Peter Ryan reported this story on Thursday, October 29, 2009 12:18:00

ELEANOR HALL: The CEO of one of Australia's biggest banks today criticised the Reserve Bank for
moving too soon on interest rates.

The ANZ chief executive Mike Smith said the RBA should have waited until after Christmas before
lifting rates and said he did not regard inflation as a "paramount" threat to the economy.

Instead he warned that the central bank board was at risk of overstating the economic recovery
particularly in the retail sector.

Mr Smith made the criticisms as he revealed that his bank made a profit this year of $2.9 billion.

Mr Smith spoke in Sydney to our business editor Peter Ryan.

PETER RYAN: Mike Smith, you believe the Australian economy is still fragile. So do you think the
Reserve Bank is on the right track in being worried about inflation enough to push rates higher?

MIKE SMITH: I think you can understand why inflation is a concern for many economists and many
central bankers.

But I actually feel right now that it's not something that is paramount. You know, I feel that we
should be really ensuring that the flywheel of the economy if you like has got its own momentum and
is moving the right way before we start worrying about inflation.

PETER RYAN: What's your view about the Reserve Bank's hawkish stance on interest rates?

MIKE SMITH: They see very different data from me obviously so I can quite understand why they have
these concerns.

But I would have preferred to have left rate increases 'til after the new year, you know. I think
if we'd had a good retail spend up into the Christmas period that really would have got the
momentum going.

Because we have to remember that the stimulus packages are also gradually easing off. To my mind
that would have been a bit more of a certain outcome.

PETER RYAN: Do you think the Reserve Bank erred in pushing interest rates up too early when they
moved earlier this month?

MIKE SMITH: Well you know I don't have their job, and as I say they see data that I don't see.

I just feel that I would have gone for looking at where the economy will go in the longer term
rather than looking at issues like a housing bubble or the inflation. I think you can deal with
those later.

PETER RYAN: Are you concerned that the economy is still fragile and might not withstand a series a
rate rises?

MIKE SMITH: Well I think you've got to be very careful. I mean I think in terms of our own business
it will put pressure on small business, on medium sized business and indeed on individuals. And
that in our business will create increased provisions.

Now for every dollar of provisions we write you've got to write 10 new bits of business to pay for
it. So my view is if you can reduce provisions that's a better outcome. Therefore I'd try and keep
rates as low as we can.

PETER RYAN: Do you think the Reserve Bank took a risk when they moved rates up?

MIKE SMITH: I suspect that there was probably feeling either way and I think it was certainly a
gutsy move.

I think that they also were very gutsy in the way that they reduced rates. So you know, you have to
give them credit for that as well, so maybe they're right.

PETER RYAN: But do you think it's more of a case of how quickly the move towards normalisation is?

MIKE SMITH: Yeah I think that's right. And I think that when we consider our region it's looking
much more normal.

But I think we have to be realistic about the fact that until the US economy really does get going
the global economy is not going to function properly.

PETER RYAN: What's your view on what will happen on Melbourne Cup day? Do you think that we'll be
in for a 25 basis point increase or 50 basis points as some economists believe?

MIKE SMITH: I mean I think on cup day it's quite enough to bet on the horses (laughs) and I never
have much luck on those. But I think there will be an increase. I suspect there will. And I think
it will be at the lower end of expectation.

PETER RYAN: If the RBA does act on Melbourne Cup day and continues to act into the new year will
the ANZ stick to the official increases or go beyond?

MIKE SMITH: You know I have said publicly that I would be reluctant to move above the official rate
increases basically because as I said, you know, I feel that that would just put more pressure on
our customer base and indeed it would actually risk increasing our provision levels.

However we're in a market. You know, I have to do what is in the best interest of all our
stakeholders so I haven't made any promises in that respect.

PETER RYAN: So no guarantees or commitments on that front?

MIKE SMITH: No I can't guarantee or make commitments. As I say I would be reluctant to do that. I
mean I would have to be forced to do it.

PETER RYAN: To the wider economy, do you think that Australia in the clear now or has dodged a
bullet as many economists have said?

MIKE SMITH: We have hit a period of blue sky, let's put it that way. But there is still an awful
lot of cloud around and I think we have to be careful and I think we mustn't be complacent that
this is all finished.

ELEANOR HALL: That's the chief executive of the ANZ Bank Mike Smith speaking to our business editor
Peter Ryan. And the full interview with Mike Smith will be on The World Today website later today.