Rudd Suggests Banks Should Help Non-banks

The Age

Friday October 31, 2008

PETER MARTIN, ECONOMICS CORRESPONDENT

PRIME Minister Kevin Rudd has called on Australia's banks to consider advancing money to troubled financial institutions.

Mr Rudd pointed out that "the banks are the beneficiaries of the Government's guarantee on deposits" in a speech in Sydney to the Business Council. "It is not unreasonable, therefore, to expect that the banks will play a continuing role in supporting the wider financial system and thus the Australian national interest."

He said the banks "could provide liquidity to various market-linked investment vehicles within the financial system by buying their securities at market prices".

Mr Rudd has asked Future Fund chairman David Murray - who is a former head of the Commonwealth Bank - to work with Treasury in its dealings with distressed institutions.

Mr Rudd rejected talk of a recession, telling Fairfax radio that the most recent forecasts in front of him continued "to have economic growth into 2009".

Reserve Bank deputy governor Ric Battellino yesterday hosed down expectations of large interest rates cuts - and uttered the dreaded word "recession".

He said that while it was true that Australia managed to sidestep the 2001 global recession, the question now was: "Can it do it again?"

He said that while that was what "we are aiming for" and that there was "nothing in the data to date to suggest we are off track", Australia was being buffeted by powerful forces and it was unclear what the net effect would be.

The statement, made to a bankruptcy conference in Sydney, and also contained in the printed version of the speech distributed by the bank, is its first public acknowledgment that Australia might fall into recession. Previously the RBA has only referred to outcomes such as "a deeper and more persistent slowing in the economy".

It follows forecasts by JP Morgan and Deutsche Bank of the economy contracting in the current quarter and forecasts by Westpac and JP Morgan of contraction - or at best zero growth - in the following quarter.

In another development, Mr Battellino warned that there were limits as to how far the Reserve Bank would cut interest rates in order to avoid a recession.

"The task of managing the economy this time will be more difficult than in (the global recession of) 2001 because we are starting with bigger inflation," he said, adding that "this could limit room for manoeuvre on monetary policy".

Financial markets took his comments to mean that a November rate cut of more than 0.50 percentage points was less likely than believed.

Futures traders cut the implied probability of a 0.75 point cut from 94% to 77%. They were still pricing in a 100% likelihood of a 0.50 points cut.

Mr Battellino also explained that there was no "line in the sand" beyond which the RBA would stop supporting trade in the Australian dollar, a remark that helped push the dollar up to 70 US cents as he spoke.

He said that rather than attempting to maintain any particular price, the RBA was buying Australian dollars to ensure that the market remained liquid.

© 2008 The Age

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