HOWARD SATTLER: Earlier today the Australian Chamber of Commerce and Industry said there's no justification for an early interest rate rise, it will choke increasing business confidence. It could do that, they said. They said that there's no move pre-emptively at this stage and said we don't see - want to see an early increase that potentially chokes off the increasing levels of confidence amongst business. Well, the last thing we want at this stage, as we come out of the great global recession, is that business loses confidence. So how do we feel about the decision by the Reserve Bank today to lift the cash rate 25 basis points from 3.00 to 3.25 per cent, effectively opening the door for the banks to lift mortgage rates above six per cent? How do you feel about that? I can tell you what it translates into. If you've got a half million dollar mortgage it will go up $76.15 per month, your repayments, to $3236.81. Let's get some reaction from the federal Government. Lindsay Tanner's the Finance Minister. He joins us now. Hello, Lindsay.
LINDSAY TANNER: Good afternoon, Howard.
HOWARD SATTLER: Are you disappointed?
LINDSAY TANNER: Oh, look, we don't comment on interest rate moves by the Reserve Bank because it's independent, Howard, but…
HOWARD SATTLER: I know you say that but you're allowed to make a comment, surely.
LINDSAY TANNER: Well, I'll have an increase on my mortgage. I'm certainly disappointed about that but I think the Reserve Bank over the past couple of months has made it clear that that three per cent official rate level was emergency rate level when the economy was under huge pressure from all those international forces and that inevitably…
HOWARD SATTLER: Still is, isn't it? Still is.
LINDSAY TANNER: It is but I think this is a signal that we've come through better than many people expected and that, for example, the growth that was going to be expected for the economy for the current financial year was actually negative. Well, I think it's generally accepted now it's probably going to be in the positive so…
HOWARD SATTLER: Well, what's wrong with that?
LINDSAY TANNER: Well, there's nothing wrong with that but what it does suggest is that the period of emergency that the Reserve Bank described is over and interest rates, of course, are still way below where they were 18 months ago so it's important to look at the wider picture here. Yes, it's going to hurt but there's a bigger picture.
HOWARD SATTLER: Yes, but you talk about the bigger picture. There's a small picture too and the small picture is people being forced out of their homes because they can't afford to pay the increased repayments. Now, what do you say about them? They're the people you represent.
LINDSAY TANNER: Well, they are and look, there's always a small number of people in that situation, unfortunately, some people who get into difficulties with their payments, no matter what level the interest rates are. So people….
HOWARD SATTLER: Yeah, but they're going to get into more difficulty now because they've got to pay more back.
LINDSAY TANNER: Well, look, there will be some individuals in that position, Howard, but what I'm saying is that no matter what level rates are there are always some people who take a bit of a gamble, who overcommit but I don't believe that's going to be very many people and we've seen rates drop so dramatically, of course, that anybody who took out a mortgage say 12, 18 months ago has seen the interest rate on their mortgage drop very significantly and this is one small part of shifting back the other way.
HOWARD SATTLER: Sorry, I've got to ask you this and I've wanted to really ask someone in your position this for a long time, who is running this country, the Reserve Bank or the Government?
LINDSAY TANNER: [Laughs]
HOWARD SATTLER: Well, you keep saying that you can't do anything about it and you can't even comment on it but surely your - you should have the interest of the community at heart and you should be the one running the show not the Reserve Bank.
LINDSAY TANNER: No, look, ultimately we are and, of course, they have independence to make these decisions in accordance with an act of parliament that the former government, the Howard government put in place and we support because it minimises the chance of political interference in their decisions and it's a very tough role to set interest rates and broadly speaking nobody's ever going to give them any tick for interest rates going up but they always are going to go up - up and down over time and the real important thing the Government has to do, Howard, is get the Budget in good shape so that it's not putting pressure on interest rates.
HOWARD SATTLER: But what if the Reserve Bank gets it wrong, Lindsay? What if they get it wrong? No one can control them.
LINDSAY TANNER: Ultimately Parliament does have the power to change the Reserve Bank Act and the Government, through Parliament does have the power to do that but there's certainly no intention on this Government's part to do that and it's always going to be a matter of opinion, of course, as to whether they've made the right move or not and there's always debate, as you know, about whether any particular move up or down has been the correct move but we believe it is important to have this separated from day to day politics you'll get less beneficial outcomes.
HOWARD SATTLER: What, manipulation? You'll get manipulation.
LINDSAY TANNER: That's right. There's no perfect system. That's probably a fair observation. There's no perfect way of doing this but we believe that the decision of the previous government was the right one in retrospect, to make the Reserve Bank formally independent so it made these choices without politicians interfering on a day to day basis.
HOWARD SATTLER: Okay, now what you can comment on is what the banks will do because it's irrelevant really what the Reserve does. The rate with them is 3.25. Wouldn't we love that? But the banks are actually doing to send their rates almost, I think it's certain, above six per cent now. Now, what do you think about that?
LINDSAY TANNER: Well, look, ultimately we obviously expect the banks will pass on the 25 points. We would clearly be disappointed to see anything further than that occur.
HOWARD SATTLER: But you can't control it.
LINDSAY TANNER: Yes, that's correct. We have got an eye very closely on the competition dynamics in the financial services sector and one of the things that is worrying a lot of people, including the Government, is the way that the non-bank mortgage sector has really shrunk dramatically because of the global financial crisis.
HOWARD SATTLER: It's almost irrelevant now.
LINDSAY TANNER: It's not quite but certainly that is a risk and we have put eight billion dollars worth of lending money into the system to help sustain those organisations in a very difficult time. We do believe that they will bounce back eventually but by how much is still unclear so we've got a very close eye on that situation because competition for the banks is very important.
HOWARD SATTLER: What if the big four just lift their rates tomorrow by half a per cent? What can you do about that?
LINDSAY TANNER: Well, look, we don't have direct mechanisms for intervening to tell the banks precisely what they should charge for their products and I don't think people would want us to be interfering to that degree because ultimately…
HOWARD SATTLER: You reckon?
LINDSAY TANNER: Well, it's your deposits that are on the other end of that transaction, Howard, so keep in mind that if I'm telling the banks to drop what they're charging people on their loans I'm also telling them to drop what they're paying you for your deposit.
HOWARD SATTLER: Yeah, I know, but you do have harsh words for them from time to time.
LINDSAY TANNER: Well, we do and we try - we do put pressure on them and I believe that pressure does have an effect. Ultimately competition's the most important source of pressure and it's a very complicated situation because they've become reliant on borrowing overseas to provide a fair proportion of what they lend to people for mortgages and, of course, that borrowing from overseas has soared in cost in recent times. Now, that cost has started to come down a bit but it's still a very complex situation.
HOWARD SATTLER: If it's starting to come down they shouldn't put the rates up.
LINDSAY TANNER: Well, it's a bit more complex than that because what happens is that they have blocks of money that they borrow for, say, three years and so if they borrowed a block of money three years ago it was at a pretty low rate and then they have to roll it over and reborrow it, even though the amount may be lower than it was three weeks - three months ago - it's still at a higher rate so…
HOWARD SATTLER: There's always a reason, isn't there?
LINDSAY TANNER: Yeah, look, I'm as cynical about the banks as you, but we are putting as much pressure as we can on them but we also have got in the back of our minds the fact that the stability of our banking system is one of the key things that set Australia aside from all these other countries, that we haven't had to bail banks out, we haven't had to buy them…
HOWARD SATTLER: Oh, you gave them some certainty but.
LINDSAY TANNER: Well, I think that…
HOWARD SATTLER: You backed them.
LINDSAY TANNER: Yes, that has been very important in keeping Australia's economy in vaguely reasonable shape when almost everybody else has been falling apart.
HOWARD SATTLER: Right, what do you think about the Chamber of Commerce and Industry warning that it could choke increasing business confidence?
LINDSAY TANNER: Look, I don't necessarily agree with that assessment, Howard, but it's fair enough to say that business confidence obviously does reflect attitudes about things like interest rates and business confidence had a real battering in the latter part of last year, early this year. It has bounced back a good deal and business investment is not as strong as it was 12 or 18 months ago but it was at absolute record stellar levels then so it's still in fairly healthy shape but it's taken a bit of a battering so obviously we are very hopeful of business confidence remaining in reasonable shape so I don't necessarily accept their point but it's a fair enough question to ask because inevitably once interest rates start returning to anything like historical normal levels that will put some pressure on businesses.
HOWARD SATTLER: Thanks for making yourself available?
LINDSAY TANNER: Very good to talk to you again, Howard.
HOWARD SATTLER: Lindsay Tanner, the federal Finance Minister.
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