P 060728Z APR 09
FM AMEMBASSY CANBERRA
TO SECSTATE WASHDC PRIORITY 1323
INFO AMEMBASSY JAKARTA 
AMEMBASSY LONDON 
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AMEMBASSY PARIS 
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AMEMBASSY WELLINGTON 
AMCONSUL MELBOURNE 
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DEPT OF TREASURY WASHINGTON DC
THE WHITE HOUSE WASHINGTON DC
NSC WASHINGTON DC

C O N F I D E N T I A L CANBERRA 000345 
 
 
NOFORN 
 
DEPARTMENT FOR EAP, EAP/ANP, EAP/EP, EEB AND EEB/OMA 
NSC FOR LOI 
TREASURY FOR WINSHIP 
 
E.O. 12958: DECL: 04/06/2019 
TAGS: EFIN ECON AS
SUBJECT: DIVISIONS BETWEEN GOA AND RESERVE BANK OF 
AUSTRALIA? 
 
Classified By: ECONOMIC COUNSELOR EDGARD KAGAN FOR REASONS 1.4 (b/d). 
 
¶1. (U) This is joint ConGen Sydney and Embassy Canberra 
cable. 
 
Summary 
------- 
 
¶2. (C/NF)   The Reserve Bank of Australia has acted 
aggressively over the last six months to address 
deteriorating economic conditions by slashing the cash rate 
from 7.25 percent to 3.25 percent.   Prime Minister Rudd and 
Reserve Bank Governor Glenn Stevens have publicly credited 
the aggressive rate cuts together with two large fiscal 
stimulus packages with preventing the Australian economy from 
spiraling into the recessionary territory experienced by 
other industrialized economies.  Yet, reserve bank officers 
and treasury officials have intimated to us recently that the 
Reserve Bank is "truly undecided" whether to go full throttle 
on interest rate cuts or hold its fire, in part because 
Reserve Bank Board members have differing outlooks for the 
economy over the next year.  Contacts confirm that the 
Reserve Bank and federal government have coordinated closely 
on policy actions in recent months, but complain that the RBA 
is taking too cautious an approach and missing the 
opportunity to help reduce the impact of a recession.  This 
is the first sign of a real divergence between the RBA 
Government (represented on the RBA Board by highly respected 
Treasury Secretary Ken Henry) since the Rudd Government took 
office in November 2007.   The monthly Reserve Bank meeting 
April 7, which will determine the cash rate for the coming 
month, should signal whether it intends to remain aggressive 
or adopt a more conservative approach. End Summary. 
 
Australian Economy:  How Bad Will it Get? 
----------------------------------------- 
 
¶2.  (C/NF) Plummeting global trade, steep fourth quarter 
contractions in Japan, Korea, and Taiwan, and a significant 
fourth quarter slowdown in China have convinced most 
Australian economists that the country is probably already in 
recession.  The debate has shifted to how deep and how long a 
recession Australia will endure, with the biggest variable 
being the extent of the global downturn and its impact on 
demand for commodities.  According to forecasts by Westpac 
and Commonwealth Banks (two of Australia's "big four" banks) 
Australia will emerge from a mild recession (contracting by 1 
percent or less) in the second half of 2009.  These forecasts 
point to a strong housing market, stimulated by government 
subsidiesfor first-time homebuyers, and larger fiscal 
stimulus as measures that will buoy the economy until global 
demand recovers.  The chief economist at each bank, however, 
admitted to us on April 2 that these forecasts heavily lean 
on the assumption that China will recover in the second half 
of 2009 -- an assumption that made them more uncomfortable by 
the week.  Reserve Bank board member Warwick McKibbin has 
indicated to us in recent weeks that he shares the view that 
China will recover in the second half of 2009, which will 
pull Australia out of recession in the same time frame.  In 
contrast, Reserve Bank Assistant Governor for Economics 
Qcontrast, Reserve Bank Assistant Governor for Economics 
Malcolm Edey told Econcouns and ConGen Poleconoff April 2 
that he believes the current recession will be worse than 
Australia's recession in the early 1990s, which lasted for 
five quarters and led the economy to contract by a total of 
1.25 percent.  He warned that Australian recessions average 
five to six quarters and indicated that the current recession 
would likely lead to an overall contraction of 2.0 percent. 
 
Reserve Bank: Undecided 
----------------------- 
 
¶3.  (C/NF) In our April 2 meeting with Edey, he admitted that 
the Reserve Bank was "truly undecided" a week out from its 
April 7 monthly Board meeting on whether to continue 
aggressive interest rate cuts.  There was broad agreement 
among the Reserve Bank Board, Edey explained, to bring 
interest rates down to an expansionary setting of 4.25 
percent before the end of 2008.  Although the Board had 
intended to wait a few months for the new expansionary rate 
to flow through the economy, Edey said the Board agreed that 
further deterioration in the global economy merited another 
aggressive cut in February.  The Board decided to pause on 
cuts in March, in part to give the Reserve Bank enough 
ammunition down the road in case the economy spirals into 
deeper recession.  Edey said that the Board was by no means 
committed to this approach, pointing out that recent 
statements by Reserve Bank officials were deliberately worded 
with a mixed assessment of the economic outlook to give the 
Board maximum flexibility to determine monetary policy 
strategy at the April 7 meeting.   He said the members of the 
Board would have to debate whether they are prepared to take 
the interest rate to "zero," like the U.S. Federal Reserve, 
or to continue to hold fire. 
 
PM's Advisor:  Better Too Much Than Too Little 
--------------------------------------------- - 
 
¶4.  (C/NF) Steven Kennedy, Chief Macroeconomic Advisor to PM 
Kevin Rudd, told us April 1 that he and his Treasury 
Department colleagues are increasingly frustrated with the 
RBA.  Praising the Bank's initial response to the global 
financial crisis, Kennedy said that the RBA's aggressive 
approach helped reassure markets and complimented the 
Government's stimulus packages.  He complained that the RBA 
is "schizophrenic" in that the Banks simultaneously believes 
that Australia will be hit hard but that it should hold off 
on further rate cuts in order to "keep its powder dry" in 
case things get worse.  Kennedy argued that the RBA's cuts to 
date have had considerable impact and that it should do more 
while its actions have traction in the real economy.  Waiting 
to see what happens runs the real risk that by the time the 
RBA decides to move, the economy will have deteriorated so 
much that further interest rate cuts may not have much of an 
impact.  He stressed that the PM would much prefer the Bank 
and the Government to have to take rapid action to compensate 
for doing to much than take corrective action after doing too 
little.  Kennedy suggested that RBA Deputy Governor Ric 
Battelino and other members of the RBA Board have been swayed 
by McKibbin's argument that the current economic slowdown is 
more likely to be similar to the 1997 Asian Financial Crisis 
in which Australia was largely spared the full impact of the 
downturn in what had been key markets.  Kennedy argued that 
McKibbin could be right, but that the preponderance of 
evidence is that the current downturn will be much worse.  He 
said that some RBA Board members are leery of appearing to be 
too close to the Government for fear that they will be blamed 
for turning a blind eye to excessive deficit spending. 
 
Comment 
------- 
 
¶5.  (C/NF)  A more cautious approach by the Reserve Bank 
would represent a divergence from PM Rudd's aggressive 
Qwould represent a divergence from PM Rudd's aggressive 
response.  Rudd will have to defend Australia's first federal 
budget deficit in eight years, when he release the budget in 
May.  Fiercely independent, the Reserve Bank will set its 
course irrespective of political consequences, but its 
decision will shape the Prime Minister's rhetoric over the 
next two months. 
 
 
Riche