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Real interest rates will prevent "the recovery"



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133/91 16 May 1991

REAL INTEREST RATES WILL PREVENT "THE RECOVERY"

Who said this?

"This 1 per cent today means the Government is saying to

Australians today, get on with it, get back out there because it is all going to happen again' ' Paul Keating on 'World Today' 16 May 1991.

Lets hope Mr Keating did not mean what he said.

Most Australians doubt that they could live through another 7 years of Keating like the last 7 years of Keating.

So why the outburst.

Because he desperately needs a recovery. His leadership

aspirations are largely dependent on some sign of life in the economy.

But there is no sign.

The Reserve Bank said today there are "some tentative signs that the economic downturn is beginning to bottom o u t . indicators generally (including the slow growth in credit from banks and other financial institutions) suggested that interest rates could be lowered further without re-igniting demand pressures."

That is "Reserve Bank speak" for politely telling their Treasurer that there are few signs of life out there on the Treasurer's scorched earth.

And why is it so?

The answer is in the Reserve Bank's next words

"even allowing for today's reductions, interest rates in real terms will remain relatively high."

And it is those real interest rates which are inhibiting a

recovery. -­

Businesses are not going to be falling over themselves to "get out there" and invest while real interest rates are stuck at current levels. There are very few projects and businesses that consistently yield acceptable rates of return with real interest rates anywhere near current levels.

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So the message from the Reserve Bank is clear enough. We will bring nominal interest rates down in line with inflation but don't expect much in terms of real rates. That's up to Canberra.

So the ball is now back in the Government's lap.

Where are the policy initiatives to get structural change going and ensure not only that the inflation gains are held onto but that real interest rates can come down and stay down?

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