Australian Rate Cut to Boost Saving Not Spending, Westpac Chief Kelly Says

By Tracy Withers - Nov 6, 2011 6:30 AM GMT+0700

Australia’s first interest-rate cut since April 2009 may boost consumer saving rather than spending, adding to the case for further reductions, according to Westpac Banking Corp. (WBC) Chief Executive Officer Gail Kelly.

The Reserve Bank of Australia cut the benchmark a quarter of a percentage point to 4.5 percent on Nov. 1, citing slowing inflation and weaker global growth. Sydney-based Westpac lowered its variable mortgage rate by the same amount.

“What will happen is that customers will take the extra cash that they’ve got and probably apply it more to debt repayment and to savings,” Kelly told the Australian Broadcasting Corp.’s “Inside Business” program.

“Ultimately what we need for the economy to grow is for people and businesses to regain confidence and to decide now is the time to spend more and indeed to invest more,” she said. “I think we’re a little bit off that at this point.”

Westpac, Australia’s second-largest lender, on Nov. 2 said second-half profit fell 13 percent as lending growth slowed and debt market turmoil triggered a drop in earnings at the bank’s treasury unit.

Slower lending signals that “customers are cautious, that they’re preferring to sit on their hands at the moment,” Kelly said. Consumers and companies who found themselves with too much debt during the global financial crisis “won’t want to find themselves in that position again, so I don’t think its a bad thing,” she said.

As domestic spending slows, and Europe’s debt crisis threatens global demand, Australia is well placed to react, Kelly said. The central bank is able to lower interest rates and the government has scope to provide further stimulus if needed, she said.

“I’d have to say I’m really happy and pleased to be a banker living in Australia,” she said. “We have the tools to play to manage a downturn. We’ve got room to go if the Reserve Bank believes it is necessary to be able to provide further support to the economy.”

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net

To contact the editor responsible for this story: Paul Tighe at ptighe@bloomberg.net