Mr REID —I address my question to the Treasurer. Can the Treasurer explain to the House the significance of the new low inflation environment now being experienced in Australia? How will this promote sustainable growth and jobs creation?

Mr COSTELLO —I thank the honourable member for Bendigo for his question. The release of the December quarter CPI figures shows that Australia has now decisively entered the low inflation league of the world. The results of the December quarter show that the all groups CPI rose by 0.2 per cent, for an annual rate of 1.5 per cent and, according to the Treasury underlying rate of inflation in the December quarter, in through the year terms, 2.1 per cent. That is at the lower end of the target which this government has set in the conduct of monetary policy, by agreement between the government and the Reserve Bank.

The benefit of that policy—which this government put in place to ensure a reduction in long-term interest rates—can be seen in the fact that the differential between the US long-term bond rate and the Australian long-term bond rate has shaved about 150 basis points, and now the margin has recently been under 100 basis points.

Sustained low inflation is important for investment and for investment expectations in the Australian economy. High inflation tends to redirect investment into asset inflation, where people take short-term decisions to try and make short-term gains. A low inflation rate means that business can invest and, as a consequence, the government has recently, in its mid-year forecast, revised business investment up to 17 per cent.

What we now have is a low inflation, high investment economy. High long-term investment is the kind of investment that is going to bring growth and job opportunities for Australians.

I do want to concentrate on one of the other benefits of low inflation. Low inflation protects people who live off savings. Many people who live off savings will be saying that in a low interest rate climate, they are not getting the kind of interest rate returns which they are used to and which they require in relation to living requirements. But low inflation does ultimately and directly help savers. It helps them in two ways: one, prices don't move against savers. That means they don't have to try and get those types of rates of return. Secondly, it preserves the value of their savings. On a 10 per cent inflation rate, the capital value of a person's savings would halve within six or seven years. On a one per cent inflation rate, that person can be assured that the value of their savings will hold up over their lifetime.

So this is a climate which is right for saving. The government wants to encourage people to save. The government has put in place, and intends to keep in place, a low inflation climate which is conducive towards that and its savings which will be so important to investment and growth and job-creating opportunities in the future.