MATTHEW PANTELIS: Firstly this hour, to interest rates, and of course we know yesterday the Reserve Bank has upped the official cash rate by a quarter of a per cent, to 3.25, for an average mortgage of around $250,000, it means an extra $40-odd of repayments to about $1570-odd per month, so it's a little bit of a hike. The scary part is perhaps another three hikes are due in the next six months, one every two months on average, at least, so that might add a total of around $120, $130 to your mortgage over that period. We'll find out about that. Lindsay Tanner is the Federal Finance Minister, he joins me now. Morning, Lindsay.
LINDSAY TANNER: Good morning, Matthew.
MATTHEW PANTELIS: Obviously the Government thinks this is a good thing, and we are the first G20 country to do this, it's a sign of a recovery, I suppose?
LINDSAY TANNER: Matthew, we don't express a view about good, bad or indifferent, it's just a reality that was always going to be unavoidable, because we had interest rates at what the Reserve Bank Governor called emergency lows, and it's certainly good to see that the Reserve Bank has enough confidence that Australia has weathered the storm, that they feel this is appropriate. But clearly there are going to be a lot of people that feel this in their wallet and their purse, unfortunately, but the interest rates we've had of course, have just been at record lows, 50 year lows that were never going to be long term.
MATTHEW PANTELIS: Is it too soon, both the union movement, the ACTU and the Australian Industry Group say it is too soon, and the general view is conditions remain soft and uncertain?
LINDSAY TANNER: Look, there's no doubt that growth in the economy is still very, very modest, to say the least, but we are in much better shape than most equivalent countries around the world, but the challenging thing though is that the Reserve Bank has to make decisions based on where it sees the country heading, so it has to kind of look through today's numbers, and form a view about what's likely to be happening in six months, nine months, 12 months time, because it can't use the rear view mirror, because then it's too late. Interest rates help to moderate the overall level of activity in the economy, they're there to ensure that we don't get inflation taking off, but equally, when we have a big hit to the economy, as we did last year, with the global financial crisis, if you drop them quickly, then that can help to stimulate the economy. But the trouble is that the Reserve Bank has to look forward, it can't just think about what's happening today, it's got to try and assess what's likely to be happening, based on today's information in six or nine months time.
MATTHEW PANTELIS: Minister, I have several emails on this, I've got one here from Geoff, who's an accountant, which I'll get you to respond to. It says, here we go again, the very same experts who took us into the recession 18 months ago, by blindly increasing interest rates to slow an economy that was already going backwards, now they want to start increasing them again, to slow an economy that's clearly just holding on, ask the blokes at Holden Mitsubishi and affiliate companies. How can the Reserve tell us to slow spending, and increase rates, while the Government are throwing money at us, telling us to spend it? One of them must have it wrong.
LINDSAY TANNER: Well look, I don't agree with that assessment, because it misses the point that I've just made, which is that yes, the stimulus money is still flowing at the moment, that's keeping things in half reasonable shape, particularly in certain sectors, when we've had the private sector basically withdraw, very dramatically, particularly the latter part of last year, and early this year. But as I said, the Reserve Bank had to look forward, and people forget very quickly just how dramatic the Reserve Bank's action was in the latter part of last year, we had full one percentage point drops in interest rates, and then further drops, so this is in part just clawing back in a very small way the dramatic action that the Reserve Bank took only six, 12 months ago.
MATTHEW PANTELIS: Is it something that we will expect to see then, the predictions of another three, I suppose, quarter per cent rises, in the next six months?
LINDSAY TANNER: As you probably know, Matt, we don't speculate about where interest rates are heading, and we treat the Reserve Bank's independence in making these decisions seriously, but I think those predictions are no better or worse than any other predictions, it's a pretty difficult game to forecast these things, and so I'd certainly place no particular credence in those particular projections. But I think it's reasonable to assume that you are not going to have interest rates at the Reserve Bank rate at 3.25 per cent forever, or for a long period of time, because that really, really low level, is a symptom of an economy that has been knocked for six. Now the data over the past few months has been more positive than most of us expected, but we're still in serious battle, and the level of growth in the economy is still pretty ordinary, and unemployment is still expected to tick up a bit, so it's pretty much a line ball.
MATTHEW PANTELIS: Minister, the Government was calling on banks to pass on the full rate cuts, when they were being cut, to mortgage holders, what's your view now, what's the message to banks today?
LINDSAY TANNER: Well, I think the main thing is that we would be decidedly unimpressed, if they chose to increase their rates more than what the Reserve Bank has increased. One of the challenging things in recent times of course has been that there has been the connection between Reserve Bank movements, and what the banks do in the marketplace, has frayed a bit, and the reason for that has been that they have relied, to a degree, on borrowing money overseas, to help finance their mortgage business, and particularly in the latter part of last year, the interest rates on that money they were borrowing overseas, just completely went through the roof. The problem is that even though it is still coming down from that now, and it's been much more normal in the past few months, the rates they're paying for that, the banks operate on the basis that they are rolling over blocks of money, so money that they might have borrowed say three years ago, at a very cheap rate, is now up for renewal, and even though the rate they're paying internationally is a fair bit lower than it might have been six or 12 months ago, it's still higher than what they paid originally. So it's like a giant mix of money flowing around, and so it becomes very difficult to get an exact fix on what their rate should be, but we certainly believe there's no justification for anything further than what the Reserve Bank has done.
MATTHEW PANTELIS: All right, minister, thank you for your time this morning.
LINDSAY TANNER: Thank you very much, Matt.
MATTHEW PANTELIS: Finance Minister, Lindsay Tanner.
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