SUBJECTS: RBA Interest Rate decision, National Accounts
KIERAN GILBERT:
We are joined on agenda by the Assistant Treasurer, Chris Bowen. Mr Bowen thanks for your time. So the RBA, after cutting the official cash rate by 400 basis points since last September, has decided to take a breather, what is your response?
CHRIS BOWEN:
Well, I think what the Reserve bank has done today has indicated that interest rates now are at the lowest levels since 1964; there has been a 400 basis point cut as you indicate. That has delivered to savings on those on a $300,000 mortgage of around $750 a month and that there is a significant stimulus in the economy, both through the Government's and Reserve Bank's actions. They want to see that through and they have indicated that they will keep the matter under close watch and make future decisions in coming months, as you would expect them to.
KIERAN GILBERT:
Mr Bowen, given that we have seen so many reductions in interest rates in recent times - we have seen the other stimulus injected into the economy - should the Government waited as well? Has the Government jumped the gun, in borrowing so much, given that the RBA, as we have seen today, is taking a step back? Should the Government have waited and watched a little bit more before borrowing as much as did, for that $42 billion package?
CHRIS BOWEN:
Absolutely not. Waiting and watching would have been a recipe for disaster. What we have done is get out ahead of the curve, ahead of other nations, and acted with a substantial stimulus package, which the Governor of the Reserve Bank indicated that he was comfortable with, before the House of Representatives Economics Committee just a week or so ago, and importantly of course, the last decision to reduce interest rates by 100 basis points - by a full per cent - was made at the same time as we were announcing our stimulus package, which the Governor and the Reserve Bank were aware of and comfortable with. So I don't think anybody can seriously or credibly make that claim.
KIERAN GILBERT:
But the RBA would have cut rates had you not forked out the $42 billion, so you still probably would have had that stimulus, wouldn't you?
CHRIS BOWEN:
Well the RBA cut interest rates by 100 basis points, just a month ago, when we were dealing with the stimulus package - when we were looking to put that into the economy - and as I say, the Governor of the Reserve Bank, before the House of Representatives Committee just a week ago, made it very clear that he was comfortable with the actions taken by the Government.
What you need is both fiscal and monetary policy working together. You can't leave all the heavy lifting to interest rates and the Reserve Bank wouldn't leave all the heavy lifting to the Government. What we have got is fiscal and monetary policy working the same direction. Any other action by the Government would be completely irresponsible.
KIERAN GILBERT:
Wouldn't the RBA been more likely to cut interest rates again today had you not forked out so much and borrowed so much?
CHRIS BOWEN:
Well as I say, the Reserve Bank reduced interest rates by a full percentage point, just one month ago, when we were stimulating the economy with the Nation Building and Jobs Plan. They were fully aware of that, comfortable with that, and what we see now is the cash rate at its lowest level since 1964. I think, in some ways, that it is unsurprising that the Reserve Bank would pause today and let that stimulus - both through fiscal and monetary policy - run through the system and see what eventuates over the next month before acting further.
KIERAN GILBERT:
I'm wondering why you didn't leave more of the burden on the RBA's shoulders and borrow less, rather than send the Budget into the red, and deeply into the red?
CHRIS BOWEN:
Well, if the Government didn't act, didn't move to stimulate the economy with a significant package, then you would have seen higher deficits and higher debt over the medium term, because you would see economic growth lower, tax receipts down, you would see unemployment higher, more people avoidably unemployed and you would see good businesses failing. So the Government acted, quite decisively, with the two stimulus packages, to ensure that fiscal policy was working with monetary policy. To ensure that both were going in the same direction. And if we didn't act, we would see higher debt and higher deficits. The real problem with the Liberal Party's analysis is that they say ‘we want lower deficits' but they would actually, by not acting, ensure higher deficits into the medium and longer term.
KIERAN GILBERT:
Chris Bowen, given the official cash rate is at 3.25%, the Budget is in deficit, do you think the RBA is leaving a few shots in the locker essentially? That more fiscal options are available as they had been, the RBA's monetary options aren't as great as they had been - down to 3.25% - is this the Reserve Bank board saying that they want to leave a few shots in the locker?
CHRIS BOWEN:
Well, when you look at the 3.25% rate, it is still substantially higher than some of the rates you see around the world - you see the United States at effectively 0%, the United Kingdom at the lowest rate since 1694 - so those countries don't have much room to move, but the Reserve Bank does have that room to move. They have indicated that they are prepared to act decisively, with some very substantial reductions in interest rates; we have seen what is effectively sixteen interest rate reductions when you look at what would normally occur with interest rate cuts of 25 basis points. So sixteen cuts over six months, they have acted very decisively, and I am sure they will continue to do so, if the circumstances require it.
KIERAN GILBERT:
Well, in a sense some positive news in the economy today, with the current account deficit, retail trade - retail spending was up for January as well - how hopeful are you, and how likely is it, that the December GDP figures, the economic growth figures for the December quarter, will actually be in positive territory?
CHRIS BOWEN:
Well of course, the January retail trade figures don't relate to the December national account figures, they are separate matters. But the January retail trade figures are encouraging; it is a good, solid increase when you bear in mind the very significant increase in December.
Look, there are plenty of commentators who will give you a prediction on what will happen with the National Accounts figures tomorrow. That's not my role, but I will say, this is very clear, if the Government didn't act to stimulate the economy, whatever figures we see tomorrow, would have been substantially worse if we hadn't acted so decisively and so early, with those very effective and very substantial stimulus packages.
KIERAN GILBERT:
The Treasurer and the Prime Minister and yourself and the rest of the Government are setting us up for a bad number though. I mean, repeatedly, pointing to other economies around the place, that have contracted in recent months; very keen to highlight that - the Prime Minister did in a speech today to the NSW Chamber of Commerce, the Treasurer again along those lines - you are certainly setting us up for some bad numbers?
CHRIS BOWEN:
We are being frank with people. The economic situation around the world is dire, seven out of our top ten trading partners are in recession; it is going to impact on us. There is going to be an impact over coming months, including in the figures tomorrow. We are just being upfront and honest with people and saying that these trends will have an impact on Australia. That's why we have acted; we have acted with two stimulus packages, that's why we have acted in concert with the Reserve Bank to ensure that fiscal policy and monetary policy are working in the same direction. Let's make no bones about it, these are tough times and we have been frank about that, and we make no apologies for it, while at the same time, pointing out, of course, that the fundamentals in the Australian economy are particularly strong and sound when compared to the nations that we would normally compare ourselves with.
KIERAN GILBERT:
Chris Bowen, there is also the prospect with the GDP figures tomorrow, that we could see two consecutive quarters of negative growth with the revised September figures and the December figures. That would leave us in a technical recession. How damaging would that be to sentiment?
CHRIS BOWEN:
It really isn't my role to speculate on what might happen tomorrow, it would be irresponsible for one of the Government's economic ministers to do so. As I say and as I stress, the only thing that is certain about tomorrow's figures is that if there hadn't been a nation building package and the economic stimulus package, the figures we see tomorrow will be substantially worse.
KIERAN GILBERT:
Just finally, the stock market has been slammed again. Amongst others, retirement nest eggs have copped a battering. It would be a brave government, wouldn't it, that looked to take away their part pension, as has been recommend by the Harmer Review?
CHRIS BOWEN:
The Cabinet, the Expenditure Review Committee will work through the Harmer Review and we will respond, in the budgetary context, as we said we would all year. The Harmer Review is a comprehensive document - a very substantial review - and it needs to be taken seriously. That is exactly what we are doing.
KIERAN GILBERT:
Okay Chris Bowen, I appreciate your time, as always. Thank You.
CHRIS BOWEN:
Always a pleasure Kieran, thank you.