RBA Interest-Rate Cut to Boost Saving Not Spending, Westpac’s Kelly Says

By Tracy Withers - Nov 6, 2011 8:00 PM GMT+0700

Australian consumers are more likely to save than spend any extra money available to them following the central bank’s decision to cut interest rates for the first time in more than two years, 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 yesterday.

Australia’s resources industry boom, fueled by demand for iron ore, liquefied natural gas and coal from emerging economies such as China and India, may cushion the nation from the financial turmoil Europe’s sovereign debt crisis is causing. The central bank last week lowered its forecasts for economic growth over the next two years, while adding that the mining-related parts of the economy are growing strongly.

“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,” Kelly said. “I think we’re a little bit off that at this point.”

Kelly, the only woman to lead an Australian bank or top-30 company, said she thought the RBA will need to make further rate cuts. “Let’s wait and see how Europe travels over the next period, but there don’t seem to be too many signs that things will settle too early,” she said.

‘Customers Are Cautious’

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 it’s 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