The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
Picture of Wayne Swan

Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

8 January 2008

Press Conference

Waterfront Place, Brisbane

Tuesday, 8 January 2008
1.00pm (Brisbane Time)

SUBJECTS: US sub-prime crisis, interest rates, Australian economy

TREASURER:

Well today I've had in-depth discussions with officials from the Treasury, the Reserve Bank of Australia and of course APRA. Those in-depth discussions have focussed on the impact of the sub-prime crisis on the Australian economy.

The good news is that Australia is well placed to absorb a slowing in the world economy which may be caused by a more protracted US slow-down. Because the truth is that the fundamentals in the Australian economy are strong. The regulators advise me that the financial sector has coped well with recent international market volatility. But I think it's very clear that Australia is not immune from the fall-out emanating from the US sub-prime crisis.

And of course I think that has been demonstrated starkly in recent days, because the US sub-prime crisis has been pushing up the cost of borrowing on international capital markets. And of course this is the context in which recent mortgage rates have increased.

Now Australian families have had something like six interest rate rises in the past three years as a result of rising inflation and the complacency of the previous government when it came to addressing key capacity constraints in the economy. So Australia does face a serious inflation challenge as well as the fall-out from the US sub-prime crisis. And I think in this environment it is critical that all sections of the community do exercise some restraint. The entire community loses from higher inflation and higher living costs and of course higher interest rates put even more financial pressure on Australian families. And of course that is why the Rudd Government has been dealing with the inflation challenge from Day One.

That is why we strengthened the independence of the Reserve Bank, working in concert with the Reserve Bank Board to put in place new arrangements. And of course that is why we have said the Rudd Government will exercise considerable financial restraint in the next budget.

Now I noted on Friday that the increase by the NAB of 0.12 per cent – whilst clearly not welcome – was a reflection of increased borrowing costs flowing from the US sub-prime crisis. Now yesterday the ANZ announced an increase of 0.2 per cent in its standard variable rate. Now that is double what the NAB announced last week.

So today I examined a range of evidence presented by the key economic officials that I met with. Now on the basis of the evidence presented to me by the key economic officials, the increase in the average cost of funds to the major banks is much more in line with the increase announced by the NAB than the increase announced by the ANZ. So on the basis of the all the evidence I have received I do believe that the rise of the ANZ, the ANZ's rise, is excessive.

I'll repeat that again. On the basis of all of the evidence that I have received, I do believe that the rise from the ANZ is excessive. Over to you.

JOURNALIST:

What can you do about that? Will you get on the phone to the ANZ and tell them that you think it's unreasonable?

TREASURER:

Certainly I would be reminding all ANZ customers that there is a competitive market out there, and if they're unhappy they ought to vote with their feet.

JOURNALIST:

[Inaudible]

TREASURER:

Well I'm saying that people should engage in the normal competitive process. The banking system in this country is competitive. If one of the major banks wants to increase its interest rates over and above other banks, then customers should take note of that and they should act accordingly. We don't run a regulated interest rate. These are matters for the market and the market will act, and people I think will vote with their feet when they look at the rate … [inaudible].

JOURNALIST:

[Inaudible]

TREASURER:

No I'm not describing the ANZ as greedy. They are a private sector organisation that acts in their own commercial interests. But what I remind the ANZ, and all Australian banks of, is that when we have competition then it means competition, and if I see someone out there who appears to be acting in a way which is excessive, who appears to be acting in a way which doesn't show the sort of restraint that is required, then I'll call it for what it is.

But we don't regulate interest rates. This is not an increase which comes from an increase decided by the Reserve Bank which decides the official cash rate. This is something which the ANZ has decided to do based on the fall-out from the US sub-prime mortgage crisis. And what I've said to you clearly today is that the increase that was announced by the NAB is more in line with the increase in the cost of funds that has flowed from the US sub-prime crisis than the increase that we've got from the ANZ. So I propose to call it for what it is.

JOURNALIST:

Do you want a ‘please explain'? Do you want them to tell you…

TREASURER:

Well it's a matter for them to justify to their customers. But I don't believe Australian families and the Australian Government should do anything other than call this rise for what it is. We believe the rise is excessive and over and above anything that could be justified by the increase in the costs which are flowing to those organisations from the fall-out from the US sub-prime crisis.

JOURNALIST:

Are you worried other Australian banks will follow ANZ's lead…?

TREASURER:

It's entirely a matter for them. But if I could just read you some figures and these are up to date. This is the indicator rate – the standard variable rate.

The average of the five banks is 8.63 per cent. The ANZ is now 8.77 per cent. The CBA is 8.57 per cent. The NAB is 8.69 per cent. Westpac is 8.57 per cent. St George is 8.57. Let's go to some of the regional banks. The Bank of Adelaide: 8.57 per cent. AMP 8.69 per cent. Bendigo 8.6 per cent. Or even if you go down to some of the mortgage originators.

It is quite clear to me that this increase from the ANZ, whilst it is entirely their right as a commercial organisation to take this decision in their commercial interests, can't be justified solely on the basis of fall-out from the US sub-prime mortgage crisis.

JOURNALIST:

[Inaudible]

TREASURER:

Well we've got to get on with the job of building a modern economy. We've got to address the inflation challenge. In my first speech last year I outlined at some length the urgent need for this country to address the inflation challenge. Part of addressing the inflation challenge is all sections of the community showing some restraint. Whether it's the banks, whether it's large companies, whether it's trade unions or whether it's the federal government itself. We are in an environment where we do have an inflation challenge on our hands. We do have a strong economy. Profits are strong. Employment is strong. Business investment is strong. We are probably one of the best [placed] countries in the world that can see out the effects of such international fall-out, so I still remain optimistic about our future.

But there is no doubt that in recent times, particularly the past month, the chances of a more protracted slowing of growth in the US have increased, and that will impact on this country, just as it has impacted on the cost of borrowings on international markets.

JOURNALIST:

So does that mean further interest rate rises are inevitable?

TREASURER:

That's entirely a matter for the Reserve Bank, and that's where we have to separate what's going on here. What we have here is independent decisions taken by banks to change their rates. What the Reserve Bank does is make an assessment about how it can contain inflation and that's why the Rudd Government has said containing inflation in the short, medium and long-term is absolutely critical. Because it is the inflationary outlook that the Reserve Bank considers when it takes decisions about the future pathway of interest rates. I don't comment on Reserve Bank decisions, but what I want to do, and what the Rudd Government is absolutely committed to doing is putting in place a range of policies that do put downward pressure on inflation.

That's why for example we brought COAG together just before Christmas. That's why we put in place those measures in the first weeks to enhance the independence of the Reserve Bank. That's why we put forward and are progressing with some urgency all of the policies which will enhance the training and skills of the Australian workforce. They are all the longer-term solutions to the inflation challenge. The inflationary pressures in the Australian economy took a long time to build and they'll take a long time to deal with, but we have begun work immediately on dealing with those problems.

JOURNALIST:

[Inaudible]

TREASURER:

Well the outlook will be higher inflation and we must avoid that. But inflationary pressures have built for a long period of time.

Inflationary pressures now forecast by the Treasury mean that they are seeing inflation at or above the Reserve Bank's target band for the next eighteen months. That is, if you like, the parting gift of Peter Costello and the Liberal Party to the incoming Government. We are going to take up the challenge of that parting legacy left to us, because we understand the importance of strong growth with constrained inflation. I don't believe the previous government did.

It is absolutely urgent that we deal with the inflationary pressures in the Australian economy so we can continue to create wealth, to create employment and to ensure that we have a very successful economy into the long-term.

JOURNALIST:

[Inaudible]

TREASURER:

Not at all. No, not at all. The Australian economy is growing very strongly. The Australian economy is perhaps the best placed of all economies in the western world to deal with the fall-out from the US sub-prime mortgage crisis. Our economy is in a healthy state. There should be no apprehension about anything else. But nevertheless we cannot avoid all of the fall-out that will come our way as a result of the sub-prime mortgage crisis in the US, and the interest rate rises from the two major banks are part and parcel of that equation.

But what [inaudible] today is that the rise from the ANZ is excessive when you consider objectively the increase in the cost of funds that have flowed from the US sub-prime crisis.

JOURNALIST:

If the crisis gets worse in the US, and the pressures put on Australian banks, would you allow relaxing the ban on the merger of the top four banks?

TREASURER:

No we're not contemplating doing anything like that. We have a very competitive financial sector in this country. The standing of major banks and financial institutions is very, very strong. As I said to you before, Australians can be confident that we have a first-class set of regulators, and I met with two of them today. We have a strong fiscal position. We have strong business investment and we have strong employment creation. The flip-side of this however is that we also have strong inflationary pressures that have come from a long period when the previous government ignored acting on capacity constraints in the Australian economy. And it is those capacity constraints, particularly when it comes to skills and education more generally and also infrastructure bottlenecks that are putting upward pressure on inflation and therefore upward pressure on interest rates. And that's why we've indicated that a very significant economic priority in the months and years ahead is to meet that inflation challenge, to meet the legacy of the inflation challenge left to us by the previous government and deal with it systematically – short-term, medium-term and long-term.

JOURNALIST:

[Inaudible]

TREASURER:

What I'm saying is that when it comes to companies, we don't necessarily need companies doing what the ANZ have just done – increasing its profit share and the way in which it's decided to go about that – but that's their commercial decision. Restraint comes down to claims by working Australians through unions as well. Restraint comes down to the Federal Government itself and we've indicated we're going to do that in the next budget.

JOURNALIST:

What about consumer spending in general?

TREASURER:

Well people will take those decisions in their own financial interests. Australian families, particularly those with mortgages have had ten straight interest rates rises in a row, six in the last three years and of course their budgets are pretty stretched. And that's why we are so committed for example to our tax cuts - to assist those Australian families under financial pressure, to have those tax cuts assist them with the financial pressures that they're experiencing around the kitchen table.

JOURNALIST:

[Inaudible]

TREASURER:

I think it's a time for everyone in the Australian community to be a bit more prudent for the next little while. But Australian families work hard. Australian families have worked hard to make this economy strong and they're perfectly entitled to share in the great gift that we have created, which is why the tax cuts have been earned by each and every one of those families and why they take decisions about how they feed, clothe and educate their children and they generally do that very wisely from my experience.

JOURNALIST:

[Inaudible]… share market. Are you concerned about the impact that might have on investors and is there anything you can do to alleviate…

TREASURER:

I don't intend to comment daily on what's going on on the share market, except to make the observation that the fundamental health of corporate Australia is very good. It's easy to get side-tracked by what occurs one day in the share market or what carries on in the US market and how it transfers to Australia. Let's take a longer-term view of these issues. The corporate sector in this country is generally in very, very good health.

JOURNALIST:

[Inaudible]

TREASURER:

I'm just saying as a community we face a significant inflationary challenge which will require restraint from everyone. Corporate Australia, working Australia and governments themselves all have to be involved to meet that challenge.

JOURNALIST:

[Inaudible]

TREASURER:

I think when we're dealing with the impact of the US sub-prime crisis the last thing we need is people playing silly politics. Last Friday I called it as I saw it.

JOURNALIST:

[Inaudible]

TREASURER:

No, in this job you've got to get policy right for the long-term. That's critical. You can't be moved to act on a day-by-day basis. Putting in place a modern economy for the future which deals with the inflationary challenge is critical. I called it as I saw it on Friday because I believe that the increase that had come through there – whilst it was not welcome – was most probably justified by the financial fundamentals in the increase in borrowing flowing to that organisation that had come from the sub-prime crisis in the United States. But when I looked at what the ANZ had done yesterday, and after I've consulted extensively with officials, I have formed the view from all of the evidence presented to me, that I regard that increase as being excessive.

JOURNALIST:

Are you hoping now that other banks will take heed of what you've said.

TREASURER:

Look it's entirely a matter for other banks. I will call it as I see it in the interests of working families and the long-term prosperity of this country. That's all you can do.

Thanks very much.