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Transcript of press conference: Sydney: 7 October 2008: interest rates; infrastructure.

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7 October 2008


Subjects: Interest rates; infrastructure.



A fairly dramatic announcement from the RBA.


Yes. We welcome the Reserve Bank‟s announcement of a full one per cent cut in the cash rate. This is a very significant easing of monetary policy. Very significant relief for Australians but, of course, how significant it is depends upon how much the banks choose to pass through to their customers. Now we‟ve said, and we maintain, that the Australian banks can afford to pass on the entirety of this cut in interest rates, this cut in the official rate.

Now last week Mr Rudd and Mr Swan ran up the white flag as far as Australian homebuyers, as far as Australian businesses were concerned. We believe the banks can pass on the full extent of this cut in the official cash rate. We believe they have the profitability, they have the capital to do so. If they believe they cannot do so then it is up to them to make that case, but we are not here to make a case for the banks. We are here to make a case for all Australians, for all Australia - small business as well as big business, borrowers as well as lenders.

Leaders in Australia - prime ministers, treasurers, and leaders of the opposition for that matter - need to remember that every Australian business is seeking to stay profitable, every Australian business is seeking to employ people, to invest, to go forward and that requires for this rate cut, to be beneficial to the whole economy, for it to be passed through.


And I might just add and just draw your attention - in the second paragraph of the Reserve Bank Governor‟s statement, Mr Stevens said, he says that the Board has decided to make an “unusually large movement in the cash rate” and he said this was appropriate and I quote: “in order to bring about a significant reduction in costs to borrowers”. A significant reduction in costs to borrowers. That‟s what we‟ve been talking about - because this rate cut will only be of benefit to the overall economy, to borrowers if it is passed on.


So banks really must pass this on?


Well, it‟s up to the banks to make that decision. The Government doesn‟t set interest rates and, of course, neither does the Opposition.

But I‟ve been asked for my view as to whether the banks are able to pass it on, and my view is, based on what we know about their profitability and their size and their strength, that they can afford to do so. But if the banks decide that they can‟t, if they believe they can‟t, then let them make that case. What we want to see from them is transparency and accountability.


Were you surprised at the size of the drop?


It was higher than anyone was expecting. So I think it was a very big drop and it was justified by those words I just quoted to you from Mr Stevens, which is that he wanted to achieve, and I quote him again: “a significant reduction in costs to borrowers”. So that‟s a signal, a very strong signal to the banks, I believe, that he wants this rate cut to benefit borrowers in a very significant way.


Does the size indicate that the economy is worse than we thought?


I wouldn‟t draw that conclusion. I think it demonstrates that the Bank has significant concern about a slowdown in economic activity both in Australia and of course around the world. I would not be at all surprised if this big cut in interest rates in Australia isn‟t matched or mirrored by big cuts by other central banks around the world in order to seek to stave off or avoid a further slowdown in global economic activity.

I might say this rate cut today underlines the fact that we were correct; the Opposition was correct earlier this year when we said we didn‟t think the Reserve Bank should put up rates at the beginning of the year because we were concerned about the likely


impact of the global economic crisis. And you may remember that at the beginning of the year it was Mr Swan and Mr Rudd who were urging the Reserve Bank to put up rates with their repeated refrain that inflation was out of control. You may remember Mr Swan said „the inflation genie is out of the bottle‟. He said it again and again in the days leading up to the first Reserve Bank meeting in February this year. So they were egging the Reserve Bank on to put up rates in decisions that were somewhat controversial.

Our better judgement was - and I think it‟s been proved better by subsequent events - that the sub-prime crisis, the economic crisis was going to have a slowing effect, a significant effect on the global economy and that those rate rises earlier in the year - it would have been better if they hadn‟t occurred. But they have now been reversed of course.


The US situation has been very seismic and rapid in the past couple of weeks so are we feeling the pain?


There is no question that we are. We are a stronger economy, our banks are better regulated. We have much more prudent lending practices as you know. You‟ve heard me say many times before, in America about 15 per cent of home mortgages are sub-prime - that is to say they‟re made to people with poor credit histories, poor prospects of repayment. In Australia that percentage is less than one per cent.

So for a whole range of reasons we are a much stronger country. We do also have the great benefit, the enormous benefit of having no government debt at the federal level, no net government debt. And that is thanks to the hard work of the Coalition over 11 and a half years of government in paying off Labor‟s debt. Imagine where we would be if we still had $96 billion of Mr Keating‟s debt on the federal books?


In the last few weeks you have advocated a bail out for financial institutions. Can banks afford to pass on this cut?


Well the premise in your question isn‟t correct. What I have said is that the Australian Office of Financial Management should and could, properly, within its mandate, consistent with its statute, invest in highly rated investment grade residential mortgage-backed securities where that market, notwithstanding its high investment grade, has basically frozen up for, well, all of this year. And that of course has reduced competition in the mortgage market.

Now as you‟ll remember when I canvassed that idea, the suggestion that I made as part of my offer to work constructively with the Government was dismissed by Mr Swan as a monumental gaffe and he made all sorts of other derogatory references to


it. Five days later it became government policy. So I‟m pleased that he took up the suggestion but puzzled why he was so dismissive at the first instance.


I‟ll rephrase the question then. Can banks afford to pass on the cut?


Well I‟ve just said that I believe, based on their profitability and their strength and their size, they are able to pass on the full amount of this cut in the official rate, yes.


Good news for homeowners, basically?


Well it‟s good news for homeowners depending on how much is passed on. We know what the Reserve Bank wants, and I repeat, the Reserve Bank Governor has said that the Bank decided that on this occasion an unusually large movement in the cash rate was appropriate in order to bring about a significant reduction in costs to borrowers. Now it‟s only significant if it‟s passed on. So he is seeking to have a significant reduction in costs to borrowers.


[Inaudible] North West Metro.


Okay, alright. We‟ll just do one on the North West Metro.


The Federal Government says there is no votes in it.


Our concern about Kevin Rudd and Anthony Albanese‟s infrastructure fund has not been a reluctance to invest in infrastructure. The Coalition invested tens of billions of dollars in infrastructure during its time in government and we are very committed to wise investment in infrastructure. What we are opposed to is billions of dollars of taxpayers‟ money being used as Labor Party slush funds for purely political purposes to support Labor re-election campaigns, to support failing and flailing Labor state governments.

And now we see in the press today the Labor state government was told by Mr Rudd not to worry about applying for assistance with the North West Metro because there were no votes in it for the Labor Party, because in that north west part of Sydney there aren‟t marginal seats that the Labor Party can win or marginal seats they seek to hold.


So again it just demonstrates what we have said. That Labor‟s approach to these infrastructure funds is that they are slush funds to be used for political purposes. Now you can create a great deal of benefit by investing in infrastructure. There‟s no doubt about that. But you can waste an enormous amount of money and those of us in Sydney know very well how much money can be wasted in poorly designed, poorly executed infrastructure. We‟ve got a great example not far from here in the Cross City Tunnel which is worth today a fraction of what it cost to build.

But we can‟t afford, particularly in these challenging economic times, to have tens of billions of dollars wasted by Kevin Rudd in an effort to prop up Labor governments failing in the states or indeed to support his own re-election campaign.

Thank you very much.