Ms WORTH —My question is addressed to the Treasurer. What steps has the government taken to lock in low inflation? What evidence is there that these policies have started to take effect?

Mr COSTELLO —I thank the honourable member for her question. This government is determined to lock in a low inflation growth economy in Australia. With regard to our commitment to inflation, with the appointment of a new Governor of the Reserve Bank, this government agreed on a monetary policy which set out an objective agreed between both the government and the Governor of the Reserve Bank, made it clear that monetary policy would be conducted with transparency and made it entirely clear that it would be done on an independent basis.

Expectations for inflation in 1996 have fallen dramatically since the beginning of the year. The government expects underlying inflation to ease to 2¾ per cent in 1996-97 and headline inflation is expected at two per cent in 1996-97. Low and stable inflation will encourage investment and improve the productive capacity of the Australian economy.

In relation to the inflation outlook, it is sensitive to wage developments. In relation to wage developments, it will be incumbent on both employers and employees to make sure that wage developments are kept within the band recommended by the Reserve Bank. I can report that financial market confidence about low inflation has been reflected in a reduction in the 10-year bond yield as against the differential with the US 10-year bond. At the end of June 1996 the yield on 10-year bonds in Australia was 8.8 per cent, about 168 basis points above the US equivalent bond. This morning the yield on Australian bonds was 7.52 per cent and less than 100 basis points above that of the USA.

It is clear that the government's monetary policy has given the government and the economy credibility in relation to interest rates. It is clear that the premium which had been built into the Australian bond rate as a result of a perception that Australia was a high inflation economy has now been taken out. These are indications that the government's policy is fully understood and is working, and they indicate a very positive investment climate for Australian business.