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RBA boss has Govt and Barnaby in sights -

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SHANE MCLEOD: To Canberra where the Reserve Bank governor has fired a warning shot at the Rudd
Government on industrial relations.

Glenn Stevens has been telling the House of Representatives Economics Committee that labour market
flexibility must be maintained under Labor's new IR laws. And he's put on the record that the
central bank is hearing a lot of concern from business.

The Opposition hasn't come out unscathed though. The Reserve Bank boss has poured scorn on claims
from the Opposition's Barnaby Joyce that Australia might default on its debt.

He also warns that interest rates are still below normal and the cycle of interest rate rises still
has some way to go.

Our economics correspondent Stephen Long is at the hearing in Canberra. He joins me now.

Stephen, how concerned is the Reserve Bank governor about these economic consequences of industrial
relations?

STEPHEN LONG: A little bit of context is important here Shane. The comments were made in response
to questions from Jamie Briggs, the Member for Mayo, who was formerly a Howard government staffer
and the architect of Work Choices. So in a sense the Reserve Bank governor was led to these
comments.

Nonetheless it's fair to say that he was in effect observing that the jury is still out on the new
workplace laws put in place by the Rudd Government.

He made the observation that the economy had fared incomparably better under the arrangements in
place at the time that the global financial crisis hit compared to previous recessions when we had
less flexibly arrangements. And he saw it as vital to Australia's economic interests that we
maintain the level of flexibility that we've enjoyed.

This is what he had to say:

GLENN STEVENS: The test is going to be how the new arrangements are basically administered and
implemented by all the parties that are involved which will be the employers, the unions, the Fair
Work organisation and so on.

It's important that all this be done sensibly. It's extremely important. And flexibility is as key
now as ever and for us to get the most value as a nation out of the opportunities that the growth
of Asia into the future presents we want to retain that flexibility. There's no question about
that.

It's hard for me to judge how serious the problems are because I'm not in those firms. I can only
record that a lot of business people are expressing concern at the moment.

SHANE MCLEOD: The Reserve Bank governor Glenn Stevens in Canberra this morning.

Stephen Long, that's probably some welcome news for the Opposition but perhaps balanced out by what
the Reserve Bank governor had to say about Barnaby Joyce?

STEPHEN LONG: No joy for Barnaby Joyce in the Reserve Bank governor's views. He pretty much, he
didn't use the word ridiculous but he made it clear that he thought that Barnaby Joyce's view that
Australia could default on its sovereign debt was extremely farfetched.

These were his comments:

REPORTER: You'd agree with me then that the comments that Senator Joyce made were just simply wrong
in relation to his commentary on Australia's position with sovereign debt?

GLENN STEVENS: Well I take it you refer to comments about default?

REPORTER: Yes.

GLENN STEVENS: Well there are few things less likely than Australia defaulting on its sovereign
debt. We never have, there's never been a default by this country.

I don't think there's ever been a default by any of the states, with one exception for one day
which the Commonwealth stepped in and fixed in 1931.

But you know there's never been an event of sovereign default by Australia as far as I know and I
very much doubt there ever will be.

SHANE MCLEOD: And Stephen the message on monetary policy; there's no joy in that for borrowers?

STEPHEN LONG: He made the point that rates are still not back to normal or average.

Now this was interesting Shane because the deputy governor Ric Battellino had observed before that
if you take into account the rates rises that we'd seen put in place by lenders, by the banks on
top of what the Reserve Bank has done then you could say that rates were in the normal range.

Well Glenn Stevens says they're not normal and they still have a little way to go before they are
normal.

This was the essence of his comments:

GLENN STEVENS: We're a fair bit closer to normal now than we were when we last met with you, given
what we've done and what the banks added on top of that.

You know when we eventually get to normal there's a bit more work to do there. But that's the order
of magnitude I think we're talking about.

REPORTER: So we're talking about still a move in terms of interest rates going up between 50 and
100 basis points?

GLENN STEVENS: We're still below normal I would say which hitherto I think has been the appropriate
place to be.

But there's still a little distance to go yet before I think you could characterise the setting of
interest rates as normal or average.

SHANE MCLEOD: And Stephen Long, does Glenn Stevens have a view on this debate as to whether
monetary policy is the way to deal with asset bubbles?

STEPHEN LONG: His comments here were fascinating Shane. He made the point that monetary policy
shouldn't be used to try to prick asset price bubbles and deflate them.

But there was a role if you had a situation where asset prices, for instance home prices, were
soaring and there was easy credit and a big expansion of borrowing and lending standards were
slipping, then he said there was a case to lift interest rates higher than you otherwise would,
regardless of the level of inflation to combat that.

So he does see a role and indeed observed that they had tried to do that to an extent in 2003 when
house prices were on the rise.

SHANE MCLEOD: Stephen Long our economics correspondent in Canberra.