PM's salvo to Reserve: drop rates

The Prime Minister will today ramp up pressure on the Reserve Bank to drop interest rates, saying it has ''plenty of room'' to stimulate the economy and halt the dramatic slide in revenue.

In a speech to be delivered in Perth, Julia Gillard will make the case for easing the debt burden on households and businesses. She will also argue strongly that her government is justified in aiming for even a small surplus in the budget, saying this will send the right signal on rates.

''A surplus budget provides room for monetary policy,'' her speech says.

The speech is pitched to keep Ms Gillard at arms length from the independent central bank, while pointing to the benefits of a rates cut.

The Reserve Bank board will consider interest rates on May 1, a week before the budget is handed down.

At the last meeting, the bank left its key cash rate on hold for a third consecutive meeting.


The central bank acknowledged that recent economic growth has been weak and it has scope to cut interest rates, particularly if inflation remains subdued.

Ms Gillard's speech will argue that the time is right for the bank to consider dropping interest rates.

''In the current economic environment, should the RBA consider it appropriate to change the cash rates, this could deliver widespread benefits for households and business, noting that a number of sectors of the economy most under strain are arguably more sensitive to interest rates,'' she says.

''There is plenty of room for the RBA to move further if need be and to all those calling for rate cuts, you should also be calling for a surplus, not opposing one.

''A surplus is a fundamental economic imperative, it lies at the heart of good economic management.

''I find myself in respectful disagreement with every commentator and economist who says otherwise, and in furious agreement with those who see the need.''

Her speech will strongly underline the need for a surplus now to provide a buffer in case of further turbulent economic times.

''It's time to get back into the black,'' she says.

''There's no clearer sign of a strong economy than a surplus … and we can give the Reserve Bank room to move on monetary policy if it chooses to, knowing that an interest rate reduction is good for families and business.'' The International Monetary Fund's latest forecast says Australia has the strongest economy in the developed world and it is expected to outperform all comers for at least the next two years.

''The IMF has said that the Australian economy is a world beater, this is great news,'' Ms Gillard said.

''The leaders I sit down with would cheerfully chew their right arms off to have the macro-economic signs that we have in this country.''

However, Opposition Leader Tony Abbott said the IMF report showed the local economy was ''underperforming'' as they had downgraded the economic growth forecast.

''It forecasts 3 per cent for the current financial year and it looks like we are going to get 2 per cent,'' he said.

''This is an underperforming economy and it's underperforming because of the poor economic management of the current government.'' Ms Gillard said the government remained determined to deliver a surplus and rejected comments from former Commonwealth Bank head Ralph Norris that such a goal was ''mindless'' and the biggest threat to the economy.

She said she had to ''respectfully disagree'' with Mr Norris.

''What the IMF is telling us, what our own economic forecasts tell us, is that we have an economy that is returning to trend growth,'' she said.

''The right thing to do when the economy is growing like that is to bring the budget back into the black and that is what we are determined to do.''