Press Conference

Treasury Place, Melbourne

Friday, 17 August 2007

12.30 pm

SUBJECTS: Financial markets, uranium, RBA Governor’s testimony

TREASURER:

The world stockmarkets were a little more stable overnight and as a consequence the Australian market this morning has been quite orderly.  Although the Australian stockmarket has taken a very considerable fall, falling about 11 per cent since the 24th of July, I hasten to remind you that it is still 20 per cent higher than its close in 2005 and 40 per cent higher than its close in 2004.  So this is a very significant correction, but it is a very significant correction off a high base.

There has been a lot of volatility in currency markets overnight and in part this is reflecting nervousness about the fallout from the sub-prime problems in the United States.  The appetite for risk has declined.  As a consequence the margin that riskier borrowers will have to pay will be higher in the United States, and also any person who is borrowing from an institution that is raising its money in the United States.  There are some Australian mortgage originators that raise money in the United States and lend it to Australian borrowers, and they will have to pay more for their finance and borrowers may well feel that. 

This is not the case with the Australian banks.  The Australian banks are well capitalised and highly profitable.  And the fallout from the US failure gives no reason at all for Australian banks to move their interest rates.

The Federal Government will do what is required to keep the economy strong, to keep inflation low, to keep pressure off interest rates and maintain the integrity of the Australian financial system.  The financial system is very strong.  The banks are well capitalised and highly profitable.  Our regulators are well resourced and they are taking a very close interest as is the Government.

At a time like this it is important that we maintain strong surplus Budgets.  We are now anticipating our 10th Budget surplus, we have no Commonwealth debt and we are investing in an asset position.  This is absolutely critical at a time when you see skittishness in world financial markets and we will do what is required to keep the Australian economy strong.  The real economy in Australia is strong.  It is growing strongly, jobs growth has been good, inflation is contained but the skittishness of world financial markets does have a ripple effect through Australia and it is important that we manage it very strongly.  

JOURNALIST:

Treasurer, in some senses is this correction a desirable outcome given that it is happening at a time of fairly strong world growth?

TREASURER:

Well this is a correction which has seen the stockmarket fall by 11 per cent since the 24th of July.  That is a very severe fall.  But it is still higher, 20 per cent higher than it was at the end of 2005 and 40 per cent higher than it was at the end of 2004.  So you have seen extraordinary growth and now a correction.  Extraordinary growth doesn’t go on forever and where you see a correction taking some of the heat out of the market you shouldn’t be surprised. And the earlier that happens, generally speaking, the less the correction is.  The real economy, however, is strong.  In Australia our real economy is growing above 3 per cent; our jobs are growing as strongly as we have seen for a generation; our unemployment rate is at 4.3 per cent.  So I would rather deal with financial skittishness and nervousness and the kind of ripple effect that we are seeing out of the United States from a strong economy than a weak one.

JOURNALIST:

Treasurer, are you concerned about the impacts of the effects on customers of non-bank loans such as RAMS?

TREASURER:

Well if you are a customer of a mortgage originator which raises its money in the United States to lend to you – and there are some – that originator may have to pay more to raise that money.  And if it has to pay more to get that money, borrowers may have to pay more to borrow that money.

JOURNALIST:

Are you concerned about those people?

TREASURER:

Of course I am.  For some people the consequence of this is that they may have to pay more because the money that is being lent to them is borrowed from the United States investors.  But I want to make this clear – this is not someone who has a loan from an Australian bank.  There are no grounds whatsoever for Australian banks to raise their interest rates.  This would be people who have taken a loan outside of the banking system who may be with a mortgage originator, but only those with mortgage originators that are raising their money in the United States. 

JOURNALIST:

Treasurer, surely that will have a knock-on effect to all borrowing costs in Australia regardless of whether they are borrowing in the US or from Australian banks?

TREASURER:

There is no reason for an Australian bank to move an interest rate whatsoever.  They are highly capitalised and highly profitable. 

JOURNALIST:

Is there anything else that the RBA or APRA could be doing?

TREASURER:

I have been in touch with all of our regulators and our regulators are monitoring the situation carefully.  Where liquidity has been required, it has been extended.  And they are properly discharging their duties in this difficult situation. 

JOURNALIST:

Treasurer, do you fear that banks, whether or not there is a reason, may use this as an excuse to raise interest rates?

TREASURER:

Well this is why I make the point: there is no excuse for the Australian commercial banks to raise interest rates.  They are well capitalised and they are highly profitable.  And I don’t believe any of them will.  There will be an effect from this dive in the United States and the effect will be that it will be more costly to raise funds from the US public or investors to be on-lent in Australia.  And there may be some originators in that position.  But we are not talking here about the Australian banks. 

JOURNALIST:

Should Mums and Dads continue to make regular stockmarket investments?

TREASURER:

Well, I am not a licensed investment adviser so I better not answer that question.

JOURNALIST:

Treasurer, what is your response to the comments by the Governor of the Reserve Bank pretty much indicating that another interest rate rise may be on the cards, or they may have to consider it regardless of whether there is an election later in the year?

TREASURER:

Well I don’t think I would agree with that assessment of what has been said this morning.  I think the assessment of the Reserve Bank is that the Australian economy is strong; that because we now have low unemployment we have to be vigilant about price pressures; that we will respond to price pressures by moving monetary policy according to the band – the inflationary band which is 2 to 3 per cent over the course of the cycle.  We are towards the upper end of that band at the moment as you would expect, because we are at the upper end of the cycle.  In fact, at this point in the cycle you wouldn’t be surprised to see inflation through the band and the fact that we are still within the band illustrates how contained inflation is.  But we have to be vigilant.  Coming from the other direction is a possible weakening of the global economy out of the sub-prime crisis in the United States.  Australia doesn’t have the same crisis, or a crisis of the same dimension as the United States because our financial markets are better regulated than the US financial markets and our economy is stronger.  But this is the world’s largest economy and what happens there does affect other nations. 

JOURNALIST:

Glenn Stevens has effectively said this morning that he won’t be afraid to pull the interest rates trigger regardless of an election if that is what he thinks is required.

TREASURER:

Well he did. 

JOURNALIST:

So how do you respond…

TREASURER:

He did it two weeks ago.

JOURNALIST:

But pulling it again, I suppose.

TREASURER:

That is a self-evident proposition, isn’t it?  When he said that he was prepared to move in an election year, what he was saying was what in fact had happened.  And that is what happened two weeks ago.

JOURNALIST:

You are not worried that he might move again, even closer to the election?  And what impact that might have on the Coalition’s stocks?

TREASURER:

Well I think the Coalition’s record of economic management is second to none.  We have now presided over the longest period of expansion in Australian history.  Unemployment is the lowest in 33 years, 2.1 million new jobs have been created and interest rates are lower than they were when we were elected.  And when you put all of that together, it is a period of economic management which would be almost without rival.

JOURNALIST:

So you are not worried that would be overshadowed by an interest rate rise right before an election?

TREASURER:

Well as I said, I think the Coalition’s economic management is there for all to see.  And the biggest risk of course to inflation and interest rates would be if industrial relations policy were changed.  This is a very important point.  How is it that wages are still contained when unemployment is now 4.3 per cent?  That is because we have made a major improvement in industrial relations.  If you roll that back as Labor proposes to do, you are going to put pressure on inflation and interest rates.  There is no doubt about that.  Labor’s industrial relations policy is a recipe for rising inflation and interest rates. 

JOURNALIST:

If you lose the election would you consider blocking that rollback?

TREASURER:

Well I am not contemplating losing the election.

JOURNALIST:

Are there enough safeguards in place to sell uranium to Russia, Mr Costello?

TREASURER:

To India, do you mean?

JOURNALIST:

No to Russia.

TREASURER:

Well before we get on to Russia, I think the point at the moment is India and I think that there are enough safeguards to sell to India.

JOURNALIST:

But having decided to sell uranium to one nation who has refused to sign the non-proliferation treaty, would you consider selling it to others?

TREASURER:

I don’t think the Government is contemplating further developments in this area.  The development which the Government has announced and discussed and put adequate safeguards in relation to is India.

JOURNALIST:

So are you in talks to sell uranium to Russia?

TREASURER:

Not that I am engaged in, no. 

JOURNALIST:

Just getting back to the Reserve Bank Governor’s comments today then, you are saying that there is nothing particularly noteworthy in those.  I mean, his assessment is right, wrong, it is repeating what he said before?  I mean, what is your assessment of that?

TREASURER:

Well I think that the assessment that the RBA has made today is pretty much the assessment which the Government has made, that our real economy is strong, that inflation is contained, that we have to be vigilant in relation to this and interest rates will go up if industrial relations is rolled back.  I think the strongest part of the testimony of the Reserve Bank Governor was his statement today that if you change the industrial relations system in Australia you will get higher inflation and higher interest rates.  That should be a warning to Labor.  I would urge Mr Rudd to very carefully consider what has been said today.  Because what has been said today is Labor’s industrial relations policy will put up inflation and interest rates.  I would urge Mr Rudd to carefully read it and to change his policy.  Okay, thanks.