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Monday, 20 June 1994
Page: 1692

Senator GIBSON —My question is directed to the Leader of the Government in the Senate. Long-term bond rates have risen by over 33 per cent since the beginning of this year, going through the nine per cent barrier last week and increasing by 38 points this morning to 9.6 per cent. Economists are now predicting that housing rates will hit 13 per cent in 1996; in other words, a re-run of what we experienced before under Labor. In the light of the market movements demonstrating that the budget strategy is clearly failing, what advice is the government now giving small business and home buyers? Is the government still advising them that they will not face significant interest rate increases under its policies?

Senator GARETH EVANS —The situation is that Australian government monetary policy will continue to focus on ensuring that low inflation is maintained. We have every expectation that that result will be achieved. As the Treasurer has said on a number of occasions, official interest rates could not be expected to remain unchanged over the business cycle as growth and activity continue to strengthen. But the continuing very good inflation outlook for Australia does mean that there is no need for monetary policy to be adjusted for some time yet.

  The increases in US short-term interest rates and world bond yields—including, of course, those in recent days—reflect trends in the United States and world economies, rather than anything that is happening in Australia. Any implications of those movements in bond rates for Australian monetary policy need to be assessed, and always have needed to be assessed, against Australia's own inflation outlook. It is, of course, the case that the US economy is operating at closer to full capacity than Australia is, and short-term interest rates were low and accommodative for their stage of the economic cycle. Potential inflationary pressures are, therefore, of much more concern in the US. By contrast, I repeat that the inflation outlook in Australia—as honourable senators should all know by now—remains very positive indeed.

  Short-term interest rates in other countries have been falling. Recent reductions in German interest rates were followed by reductions in interest rates in a number of European countries. The rise in bond yields which we are looking at at the moment appears to be perhaps more than anything else—and certainly at least partly—due to expectations of stronger world growth against the background that I have just described. In recent days, as we all know, a further factor has, of course, been concern about the possibility of higher inflation in the US arising from a number of factors, including a weaker US dollar.

  The overall picture is one where monetary policy in Australia has been able to be eased substantially since January 1990. Official cash rates have been reduced by 13 1/4 percentage points, from a peak of around 18 per cent, to be currently 4.75 per cent, which is their lowest sustained level since the early 1970s. Lending rates are now at their lowest level for at least a decade, although the rate that faces individual borrowers will always depend, as it does now, on one's credit standing.

  The heart and soul of the story are the situation in relation to inflation and inflation expectations. The decline in interest rates that we have seen in Australia has been made possible by that decline in inflation and inflationary expectations. The sustained shift to a low inflation environment—which we will lock in, of course, through the fiscal deficit reduction strategy that I made the subject of the first answer—will provide a solid foundation for growth in productive investment throughout the rest of the 1990s.

  The decline in interest rates that we have seen has been very positive for business and household cash flows. It has been very positive for the process of business balance sheet repair. It has been positive for business and consumer sentiment, and it is proving that it will be ever more positive for the investment climate. The economic recovery is strengthening. There is a mass of statistics which confirm that. In that environment, the inflation outlook continues to be very good indeed, with the result that the monetary policy and interest rate outlook also look good just for that reason.

Senator GIBSON —Mr Deputy President, I ask a supplementary question. If, as the minister says, the government is concentrating on keeping inflation low, are short-term interest rates being deliberately held down by the Reserve Bank as a result of pressure from the Prime Minister, who has often claimed that the central bank is `in his pocket'?

Senator GARETH EVANS —There is no substance whatsoever to that question. The reason why interest rates are being maintained at the low levels that I have described is simply because the economic fundamentals in this case are so sound and the inflationary expectations in this economy are so fundamentally sound. That is the dynamic that is holding the situation together; it is not jawboning or anything else from the Prime Minister or anybody else.