SUBJECTS: Interest rates, Reserve Bank of Australia, consumer confidence, China, Joe Hockey.
KIERAN GILBERT:
Good morning and welcome to AM Agenda Assistant Treasurer Chris Bowen. Mr Bowen thanks for your time this morning.
CHRIS BOWEN:
Always a pleasure Kieran.
KIERAN GILBERT:
We've seen a coordinated rate cut from those central banks, the US Federal Reserve, the bank of England, the bank of Canada, Sweden, Switzerland, the European Central Bank. Still the volatility on global markets, is anything going to work?
CHRIS BOWEN:
Well look the only thing certain about this crisis Kieran is its fluidity but we are seeing coordinated actions across the world. We are seeing central agencies taking what appear to be appropriate actions and of course the Reserve Bank has been at the forefront of that as has been the Australian Government over recent weeks and months.
So we are seeing, what I think, is the Reserve Bank handling this issue as well as if not better than any of their counterparts overseas which is a cause for confidence as well.
KIERAN GILBERT:
So you think the RBA lead the charge on this front?
CHRIS BOWEN:
Well I think the Reserve Bank has, since this issue began, handled the world crisis as well as if not better than their counterparts overseas, as has APRA and the other Government agencies involved. Which is a cause for confidence for Australian investors and Australian residents.
KIERAN GILBERT:
What about the fact that you've seen this multi-billion pound bailout - this British bailout - the coordinated rate cuts. Still the FTSE's down. European markets are down. Really you talk about confidence but there's not a lot of it coming out of that part of the world at the moment?
CHRIS BOWEN:
Absolutely, we are seeing a crisis of consumer confidence around the world, a crisis of investment confidence and that's why these sorts of coordinated actions are important and will take some time for them to flow through the system. But we do need to see a reinvigoration of confidence around the world and that's what we'll see. Things will return to a more normal level when ever that happens.
KIERAN GILBERT:
But Hank Paulson from the Treasury Secretary said in Washington over night that more financial institutions will likely fail, despite that huge bailout in the States.
Where is the bottom in all of this? Are your advisors, your regulators telling you what to expect?
CHRIS BOWEN:
Look there's a range of views. We take advice from a range of sources - Treasury, APRA, the Reserve Bank as well as of course the institutional, international bodies which the Treasurer is dealing with over the weekend - the IMF the World Bank etc. The IMF has said that they envisage things returning to more normal levels next year.
But as I say the only thing that's certain about this Kieran is that its fluid, anybody who predicts when this will bottom out, when we are about to turn the corner is taking a huge punt. All we can do, as the Australian Government, is to ensure that we are best placed to get through this crisis - which we are - and that we can reassure the Australian people that we are, as well placed if not better placed, than any other nation in the world to get through this.
I mean when you look at Hank Paulson's statements overnight they underline the sub prime issues in America. The actions by the British Government and the Bank of England over night underline that there are direct exposures by the British banks to the sub prime issue in the United States. They're not exposures that Australian banks have, by and large.
Australian banks are not exposed to the sub prime crisis in any substantial way. When you look at the twenty banks around the world that are AA rated, four of them are here in Australia. Much more than we would be entitled to if you just look at our population. So there are a lot of things we need to point to in Australia to underline the fact that we are differently placed and better placed than other nations around the world.
KIERAN GILBERT:
Was it encouraging to see the IMF report card overnight that basically slashed the forecast for world growth but still fairly robust growth forecast in Australia, 2.5% next year, 2.2% the year after?
CHRIS BOWEN:
Absolutely. The IMF underlines what we have been saying - that we are better placed to get though this. Two points out of the IMF report, Kieran, one is that Australia is about the best placed country in the world to get through this and two that out fiscal management, our large budget surplus, is very important in providing the flexibility to get through this.
This is what we've been saying for some time, that we need to ensure a very healthy budget surplus to allow us the flexibility over coming months and years to deal with the waves of this crisis. So it's a very important message from the IMF to ensure that the budget surplus remains very strong and that the budget should pass the Senate.
KIERAN GILBERT:
Okay, on a slightly different issue, more specifically our relations with China and whether or not that will help inoculate the Australian economy from the global fallout. The Prime Minister said yesterday part of the long term strategy and the strategy for the period immediately is how to engage more deeply and broadly with the Chinese economy.
How central is China to Australia coming out of all this relatively unscathed?
CHRIS BOWEN:
One of the key factors in Australia getting through this crisis is our relationship with China. Our terms of trade have grown dramatically in recent years has been one of the pluses in the economy. China's growth rate has been spectacular and that has flowed through to Australia's commodity sector.
There are expectations that China's growth may moderate a little, but they are coming off a very high base, and moderations is not an unusual when you are coming off a high base in the international circumstances. So the relationship with China, our trading relationship with China will be very important over coming months.
KIERAN GILBERT:
And related to that, the WA Chamber of Commerce and Industry - of course the resources boom state - has not revised down its growth forecast of 5.5 per cent over 2008-09 and 6.25 per cent for the following two years. It's a bullish assessment but is it an accurate one?
CHRIS BOWEN:
There is no doubt we expect that economic growth will be affected, across the board. We expect the real economy to be expected by this financial crisis. Now Western Australia, more than any other state, is closely linked to China, and the impact on China is going to be less, on all reports than the rest of the world. So Western Australia will be well-placed, like the rest of Australia - I'm not going get into speculation about the exact forecast of a modelling agency in Western Australia - but clearly Western Australia is very closely linked to China, which continues to grow strongly.
KIERAN GILBERT:
Okay, Joe Hockey, the Shadow Finance spokesperson, said the RBA had questions to answer. He was critical of the RBA; he said they misread the whole situation. Given that we have seen three rate increases since November last year, and two cuts, it does seem a bit all over the shop. Is Joe Hockey's assessment a fair one?
CHRIS BOWEN:
Absolutely not. Joe Hockey's intervention yesterday was extraordinary. The Reserve Bank has dealt with the highest inflation in Australia in sixteen years. Now the combined actions of the Reserve Bank and the government bringing down a contractionary budget - contractionary fiscal policy - has meant that the Reserve Bank is more comfortable with reducing interest rates. They forecast inflation to fall, so for Joe Hockey to say they shouldn't increased interest rates and they were wrong about inflation just shows that he is out of touch with economic reality, with the greatest respect to him.
For Joe to suggest that we should have just led inflation roll on, imagine what would have happened if we had continuing forecasts of very high inflation with this crisis as well. We needed to break the back of inflation and inflation is an ongoing issue, but the Reserve Bank now feels comfortable enough to take the very substantial action that they have, in conjunction with the more contractionary fiscal policy, to mean that fiscal policy and monetary policy have been heading in the right direction - in the same direction - to put downward pressure on interest rates and inflation. Which means that we are now in a position to respond more flexibly to this international crisis.
For Mr Hockey to say what he said yesterday - to condemn the Reserve Bank - shows that he is completely out of touch with the actions taken by the Reserve over recent months, and the necessity for them to do so.
KIERAN GILBERT:
Assistant Treasurer Chris Bowen, as always, thanks for your time.
CHRIS BOWEN:
Always a pleasure Kieran.