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

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

10 January 2008

Interview with Tim Cox

ABC Melbourne Morning Programme

Thursday, 10 January 2008

SUBJECTS: Interest rate, inflation, US sub-prime crisis, Peter Costello, discussion with US Treasury Secretary Hank Paulson

TREASURER:

Good morning Tim. Good to talk to you.

COX:

What role will the retail ….the big …..raising their rates have perhaps on slowing the economy as the Reserve is trying to do? Might they be doing the Reserves work for it?

TREASURER:

Well that is a matter for the Reserve and I am not necessarily sure that they are doing the Reserves work. They are simply responding to events in the United States. They are saying that the increase in the cost of borrowing justifies the rate increases that they have announced but you see, I have taken a lot of advice, particularly from economic officials, as to what level of increase would be justified by their funding cost increases caused by the sub-prime crisis. And as you would recall, a couple of days ago I made the point that the average increase in the cost of funds was more like the announcement that came from the NAB than the announcement that came from the ANZ and I just said very clearly that I regarded the announcement from the ANZ as being excessive and not in line with the advice that I had received from economic officials about what the increases in the cost of their funds had been.

COX:

Are you critical then of the way the Commonwealth lifted its rates yesterday?

TREASURER:

Well the Commonwealth increase yesterday was more in line with the advice that I have received about the increase in the cost of funding to the major banks. You see, this has been going on for some time. Even last year, a number of financial institutions increased their rates in August, September and right through to October and of course we had no commentary from the Liberal Party about that because you see, we have a very elevated level of inflation in Australia at the moment. There has been something like 10 official cash rate rises in a row. Now, on top of that including last year, we are getting increases in rates caused by the fallout of the US sub-prime mortgage crisis.

COX:

Now the banks of course will continue making their multi-billion dollar profit which is what happens in a free-market economy. Is it fair, do you believe as Treasurer, as the centre of financial policy for the country, if they keep hiking the rates when so many people are doing it increasingly tough?

TREASURER:

I have no doubt that these rate increases are most unwelcome. They are certainly not welcome by the Australian Government and they are certainly not welcome by business and they most certainly are not welcome by Australian families. But all of them are unavoidable given what is occurring in terms of the fallout from the US sub-prime crisis. Now, what I have said very clearly is, that those banks that take the opportunity to put in place excessive increases and I make that point in the case of the ANZ, they will be judged harshly not only by the Australian Government but also by their customers. And their customers should take the opportunity to examine very closely those banks that have hiked their rates substantially and take their decision accordingly.

COX:

How much more exposures will those big Australian banks have to the fallout from the sub-prime crisis?

TREASURER:

Well that's a matter for them. I have been advised by officials that they are not necessarily as exposed as many institutions are in the United States and just this morning, for example, I had a discussion with the US Treasury Secretary, Paulson about these matters in the US. We are well placed to ride out the turbulence that flows from events in the United States but we are not immune from it and that is what we are talking about now. That economy is going to slow. That will have a flow-on effect to Australia just as the increase in the cost of funding from the sub-prime crisis is having an impact here. What we are trying to do is minimise those increases and that is why I made my statements a couple of days ago. We will view very dimly excessive increases from banks that are indicating or that we indicate are not in line with the average increase in the cost of funding flowing from the sub-prime crisis.

COX:

But if you are not aware of the extent of their exposure to the fall-out from the sub-prime debacle, how can you be critical of how far they're raising their rates?

TREASURER:

I am not saying I am unaware of it.

COX:

…matter for the banks I gather than that you are not sure what the extent of the exposure is?

TREASURER:

I met with APRA the other day. I met with the Reserve Bank. They are talking daily to the banks about their exposure and about all of the issues associated with the sub-prime crisis. The advice to me from APRA, the advice to me from the Reserve Bank is that our financial institutions are generally in quite good shape. That is the advice to me but I don't get from those officials, the detailed financial projections of the ins and outs of every financial institution in the country. That is their job and they inform me that they are talking to the banks regularly about all of these issues and they are satisfied that our financial institutions are in reasonably good shape.

COX:

Alright, Peter Costello says the banks are taking advantage of your inexperience. How is that wrong?

TREASURER:

A leopard can't change its spots. We have had 10 rate rises, official cash rate rises in a row, six in the last three years and, of course, increases in rates last year caused directly by the sub-prime crisis and Peter Costello can't even admit that he has got any responsibility. [Inaudible] Well he does and on top of that, he has left an elevated level of inflation in this economy which is putting further upward pressure on interest rates. Peter Costello should be the last person lecturing people about interest rates.

COX:

What he is saying though is that interest rates are higher under the Labor Party than what they would have been under the Coalition.

TREASURER:

There has been 10 official cash rate rises in a row, six under Peter Costello in the last three years when he promised to keep rates at record lows. Peter Costello's legacy to the Australian people has been record-high interest rates in an elevated level of inflation which is at or above the Reserve Bank's target for the next 18 months. That is a pretty dreadful record but it seems that he can't accept any responsibility for it whatsoever. What we have made very clear is dealing with the inflationary challenge left to us by Peter Costello is a very significant priority for the Rudd Government and we have been dealing with it from day one.

COX:

But outside the rate rises dictated by the Reserve Bank, did Peter Costello preside over any rate rises that the banks themselves impose?

TREASURER:

Yes he did – the 14th August, 8th September, 11th September and 2nd October. They were all increases to rates by various financial institutions caused directly by the US sub-prime mortgage crisis.

COX:

Can Australia withstand the full extent of this fallout?

TREASURER:

Yes, of course we can. We are well placed to withstand this fallout but what we do need to do is to deal with our domestic inflationary challenge. Our domestic inflationary challenge left to us by Peter Costello after he ignored repeated warnings from the Reserve Bank about the skills crisis and infrastructure bottle-necks, it has put upward pressure on inflation and therefore upward pressure on interest rates. All sections of the Australian community are going to have to come together to work hard at dealing with this inflationary challenge that has been building for a long time was built for a long time under Peter Costello and we have begun work on that from day one.

COX:

The Reserve Bank Board meets on 5 February. What would you, at this distance Treasurer, advise that they take into account?

TREASURER:

Well, I don't lecture the Reserve Bank Board.

COX:

I'm not asking you to lecture and I asking what you would ask them to consider.

TREASURER:

They make their decisions independently. What I say publicly is that the Rudd Labor Government will use every lever available to it to put downward pressure on inflation. We have already indicated that we need to have a very tough budget. There needs to be strict budget discipline. The Federal Government needs to play its part in putting downward pressure on inflation and we will do that. We are also dealing with the skills crisis and we are putting in place a range of long-term policies to put downward pressure on inflation. But inflation took a long time to build under Peter Costello and the Liberals and it is going to take some time to deal with but we have begun work on a series of policies to do that.

COX:

Will you use some of the surplus perhaps to take some of the sting out of what would appear to be a move in the direction of a recession in the United States.

TREASURER:

I am not sure that domestic policy here will influence whether there is a recession in the United States or not.

[Inaudible]

COX:

Could you reduce some of the sting of it by using some use of that budget surplus?

TREASURER:

Could I just make a couple of points. I spoke this morning the Treasury Secretary Paulson in the United States. He is not predicting a recession in the United States. They are seeing a slowing of their domestic economy but there are some strengths in the US economy and some weaknesses. The important thing that we have got to do for our economy from the fallouts from events in the United States is to modernise our economy and, most particularly, invest in the skills of education of our people and deal with those the infrastructure bottlenecks those twin investment deficits left by Peter Costello – the skills deficit and the infrastructure deficit so we can make our economy more productive and put downward pressure on inflation and put downward pressure on interest rates.

COX:

Wayne Swan, good to talk to you again. Thanks for your time.

TREASURER:

Great to talk to you.

COX:

Treasurer, Wayne Swan.