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Wednesday, 27 February 1985
Page: 245

Senator WATSON —My question is directed to the Minister for Finance. Given that Australia's monetary supply is running substantially in excess of budget, a heavy trade imbalance, a burgeoning Budget deficit, a lower exchange rate, high government borrowings and average weekly earnings increases running in excess of those of our major trading partners, does the Minister expect inflation to rise in the medium term? On what rationale does the Treasurer base his conclusion that interest rates, after payment of current tax obligations, will not rise?

Senator WALSH —I did not hear the early part of that question, but I think I got the substance of it satisfactorily. There are references to the current account deficit, the Budget deficit, the falling value of the dollar and so on. The bottom line of the question seemed to be whether, as a result of all these factors, inflation was likely to rise or remain stable in the medium term. Of course, it is undeniable that a sustained fall in the value of the Australian dollar will have some effect on the consumer price index, although, as I explained the other day, import prices are a minor component of the CPI regimen and even changes in import prices are not normally entirely passed on to the CPI.

The answer to the question is no, inflation is not likely to rise in the medium term because, by April, we will have gone through a 12-month period in which here has been no increase in wages. It is expected that there will be an increase of the order of 2 1/2 per cent in April. That will have a far more significant impact on the consumer price index and, to the degree that the nominal interest rate is not influenced by the CPI, therefore no effect on interest rates.

Senator Watson seems to be labouring under the misconception that, because the price of the Australian dollar has fallen, necessarily interest rates will increase and has clearly failed to understand a major reason for the decision to float the Australian dollar; that is, with a floating dollar it will not be necessary to increase interest rates in order to protect the value of the currency.

In short, the outlook for the CPI and interest rates over the medium term-I do not think anybody can sensibly make predictions beyond the medium term-is that there are not likely to be any increases, as the Treasurer has said. Indeed, I would suggest that there is the possibility of some reductions, in marked contrast to a situation which prevailed when this Government came to office just under two years ago when inflation was in double figures, unemployment was in double figures, economic growth was negative and the country was in the midst of the deepest depression that it had known in the previous 50 years.