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Interest rate cut



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The Reserve Bank's easing of monetary policy today was largely expected but will be welcome news for many hard pressed

businesses and families.

The main concern must be to ensure that interest rate reductions are sustainable. In short, any further blow-out in the Budget deficit could threaten the cuts in interest rates which we've seen so far.

The Reserve Bank Governor noted in his announcement of the Bank's intention to reduce cash rates by 1 percentage point that "In coming to its decision, the Board was also aware that the

Government is proposing to make a statement soon which will aim both to assist the recovery and improve the economic environment for sustained, non-inflationary growth into the 1990s. The content of that statement will obviously be one important

influence in shaping the future stance of monetary policy”.

Given reports in today's media that Mr. Keating is planning to pump-prime the economy in his forthcoming statement, and on top of the disastrous current account figures, markets will expect a cautious approach to any further easing in monetary policy.

Today's cut again confirms the severity of the recession

engineered by Mr. Keating to fix the current account. The dismal failure of that policy was evident in the November 1991 current account deficit which carried a grim warning for Mr. Keating's first Cabinet meeting of the precarious state of Australia's external account.

Obviously lower real interest rates are an important element in reducing costs and for paving the way to investment and higher productivity but there is an urgent need for an extensive range of reforms to the tax system, the industrial relations system,

and to the size and functions of government, which when

implemented together, can help to ensure a sustained reduction in interest rates. These reforms which are comprehensively listed in 'Fightback', should be the centrepiece of Mr. Keating's Economic statement.

The Government's claims of a recovery are undermined by the November 1991 Building Approvals which fell 4.5% from October 1991. Only yesterday the Joint Economic Forecasting Group claimed that "a recovery in housing activity can be expected in

the December quarter", whereas the ABS today notes that the trend in dwelling unit approvals has flattened out. Although the public sector was largely responsible for the November fall, the ABS notes that the trend in "private sector house approvals has also flattened out somewhat.,,.".

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Mr, Keating put up interest rates to engineer the recession we had to have but now the fear of unemployment has so undermined business and consumer confidence that few Australians accept Mr, Keating's claim that the recovery is underway. As a result/

their concern about the future is limiting activity.

Contact: Mr. Peter Reith M P f Telephone: 06 - 277 4022 059 - 777 212

8th January 1992.