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Reserve Bank slashes interest rates.

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7.30 Report Reserve Bank slashes interest rates


Reserve Bank slashes interest rates

Reporter: Greg Hoy


KERRY O'BRIEN, PRESENTER: While many households around Australia are tonight calculating how much they're going to save in their mortgage repayments after the latest big interest rate cut, market economists are still waiting for signs that the rapid decline in the official rate in recent months is having the desired effect on Australia's slowing economy.

Today's cut of a full percentage point to a six-year low of 4.25 per cent in the cash rate brings the total cuts by the reserve to three percentage points in less than three months. This is the most rapid plunge in rates since the '91 recession.

But there are strongly divergent views emerging amongst economist as to whether this dramatic application of monetary policy to try to limit the damage here from the global crisis is having or is likely to have the desired effect.

Greg Hoy reports.

GREG HOY, REPORTER: It 'tis the season and Australians are grimly determined to enjoy what might be remembered as that grim Christmas of 2008.

VOX POP: I have spent exactly the same as I always have spent. And, just, yeah, because I prepared for it.

VOX POP II: I've spent the same as I would've as well, but we're thinking next year we've got to pull the belt in a bit.

VOX POP III: We're buying presents when they're on sale.

GREG HOY: Stoic, given there's no shortage of grinches about forlorn about the state of the Australian economy.

STEVE KEEN, ECONOMICS, UWS: They're now deciding I want to reduce debt as much as I can. As a result, the spending that's taking place in the economy is going to tank because spending is a sum of income plus the change in debt. And that change in debt, which has been positive in adding to spending for the last 15-20 years, is now turning into a very big negative.

GERRY HARVEY, CHAIRMAN, HARVEY NORMAN: Well, the casualties will all happen between January and June, 2009 because, you know, there's a lot of our shops, for instance, that are not making money. So we know from that that a lot of other retailers out there have got exactly the same problem. So, maybe we're over retailed - there are too many retail shops.

GREG HOY: Just as glum is most of the latest economic data. While food retailing remains strong, clothing and home wears do not. The Australian dollar is down, with commodity prices, the stock market followed Wall Street down, manufacturing activity is at a 16-year low, property prices are falling, and on it goes.

Ever the optimist, the Governor of the Reserve Bank Glenn Stevens, who says Australia should not talk itself into a recession, topped up the stockings of Australian households today with another whopping one percentage point cut to official interest rates, just in the nick of time to fuel St Nicholas' shopping spree.

STEPHEN HALMARICK, CITIGROUP AUSTRALIA: We see that as a very positive sign for the outlook for the economy, but clearly they're concerned that the global outlook is still so negative and financial markets are so fragile that they need to move as quickly as they have.

GREG HOY: So it wasn't all good cheer from the Govt', who stated:

"With confidence affected by the financial turbulence and a decline in the terms of trade now under way, more cautious behaviour by both households and businesses is likely to see private demand remain subdued in the near term."

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WAYNE SWAN, TREASURER: We join with the families and the businesses of the nation in welcoming this very substantial relief. The Government does expect the banks to pass this on in full.

GREG HOY: Some banks will and some won't. But the question dividing the bulls from the bears is: has shock therapy of four such significant cuts in official interest rates had the desired effect?

MICHAEL KNOX, CHIEF ECONOMIST, ABN AMRO MORGANS: We believe that they will work, and in our modelling of the Australian economy, they're the only thing that's holding the Australian economy up. Even though we're not going into a recession next year, Australia will go into what is called a growth recession. And a growth recession is where output slows but is still positive, but unemployment rises.

STEVE KEEN: I'm afraid cutting interest rates to try to fix this problem is the classic shutting the stables after the horse has bolted. And the horse is the sheer level of debt that was allowed to be accumulated in the last 15 years.

GERRY HARVEY: Well, it's not yet, but it's very good shock therapy. I mean, our rates are now at 4.25 per cent. That's as low as it's been in 30 or 40 years. And, you know, unemployment levels at over - just over 4 per cent; again, very low. And, you know, in this financial crisis there's something you shake your head and sort of: how does this work?

GREG HOY: The Reserve Bank is well aware, though it only has one blunt instrument to use like an economic cattle prod. Cutting interest rates is a far bigger jolt to the Australian economy than many others. While US mortgages and all but 20 per cent of New Zealand mortgages pay a fixed rate of interest, 80 per cent of Australian borrowers pay variable rates. And with the high level of debt here, interest rates have

risen from 7 per cent of disposable income to 14 per cent in the past six years, lowering interest rates is a far greater stimulus for fuelling disposable income than for other nations. And to further fuel the economy, there's the falling price of fuel itself.

VOX POP IV: When you've got extra dollars in the pocket, so, you're going to spend it somewhere and on something else. So, I'm happy.

VOX POP V: What with the mortgage and the prices of raising three kids, anything helps. So, it certainly makes Christmas a little bit more enjoyable.

VOX POP VI: Massive difference, yeah; really excited to see a drop.

GREG HOY: But, we are told: don't get used to it.

MICHAEL KNOX: As the US recovers from recession and, of course, I've said that's not until the end of next year, you'd expect oil and petrol prices to go back up again. So, the respite that we have in petrol prices - well, it might last for another six months or nine months, but don't expect it to last much more than that.

GREG HOY: So much more pump priming needs to be done of course; most are predicting further interest rate cuts next year, while some want investment and depreciation allowances from government to bolster long-term employment in the all-important private sector. But is there any sign of light emerging at the end of this dark tunnel? That very much depends, it seems, on who you ask.

STEVE KEEN: Half the debt that's been issued to people for mortgages shouldn't have been lent in the first place. And if you therefore reduce that debt by fiat which was what happened quite dramatically during the 1930s, then that reduces the debt burden on the economy and makes it possible for the economy to recover. But so long as we continue trying to honour debt that should never have been issued in the first place, we'll simply tank.

STEPHEN HALMARICK: We don't see that. We think there's a lot of fundamentals in the Australian housing market very different to the US. There hasn't been a sub-prime industry here, and certainly not to the same extent as the US. We don't have an oversupply of housing, in fact we have an under supply. The banking system is still in pretty good shape, as we've seen today: passing through the lower mortgage rates really quickly. We do expect some weakness in the labour market in Australia, but certainly not to the extremes that we're seeing in the US and other countries.

GERRY HARVEY: The only thing you can put it down to is it's a lack of confidence. If we can all just get together as a collective and say, "Today is the start of a new period in time. We will now have more confidence from this day on," and we all acted and did that, then maybe we could create something that no other country had ever done. I mean, maybe I'm dreaming.


Gerry Harvey is a man with his feet firmly planted on the ground.

Greg Hoy with that report.

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