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Costello plays down rates fears -

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Costello plays down rates fears

Broadcast: 25/07/2007

Reporter: Helen Brown

Treasurer Peter Costello says inflation figures are in line with Government expectations, and there
is no need for concern over a possible hike in interest rates.

Transcript

TONY JONES: Well, the Howard Government is now facing the possibility of an interest rate rise in
the lead up to the election. Official figures released today show the Consumer Price Index, the
main measure of inflation, is rising. Analysts are speculating the Reserve Bank may have to move as
early as August to raise the official interest rate in a bid to keep inflation in check. Well, one
of the problems is the strength of the economy, but the Federal Treasurer Peter Costello, says
inflation is contained. Helen Brown reports.

HELEN BROWN: In one move, fuel prices go up and so does the nation's inflation rate. An increase in
fuel costs of around 9 per cent in the last three months has helped push up the consumer price
index by 1.2 per cent.

PETER COSTELLO, TREASURER: This is the lowest consumer price index rise we've had for three years
since March of 2004.

HELEN BROWN: While the Treasurer seemed comfortable, many analysts say the figure will be causing
discomfit to the Government and the Reserve Bank.

CHRIS RICHARDSON, ACCESS ECONOMICS: It's not a good inflation number and there's now considerable
pressure on the Bank to, for the first time in 20 years basically, raise interest rates ahead of an
election.

HELEN BROWN: Even though the annual consumer inflation number went down to 2.1 per cent, financial
markets were surprised. They were expecting it to drop lower. They're now factoring in an 80 per
cent chance of an interest rate rise in August, and many economists agree.

SU-LIN ONG, RBC CAPITAL MARKETS: Definitely it increases the odds of the Reserve bank having to
lift rates. We know they have a tightening bias, and we would have to argue that the odds of a
near-term hike have definitely lifted following strong data.

HELEN BROWN: The Treasurer says the figure is consistent with the Government's forecast, and within
what's called the "comfort zone", an inflation number between 2 and 3 per cent. It's no doubt
hoping voters look to its record on economic management, a track record reinforced by today's
Newspoll results.

PETER COSTELLO: Inexperience in economic management, wrong turns on economic policy, would
represent a very big risk in this economy.

HELEN BROWN: Apart from fuel, the cost of renting went up. And the effects of the drought are still
being felt with fruit and vegetable prices rising by an average of 7 per cent. But take out the
more volatile items and economists say the number is still high.

SU-LIN ONG: The underlying pace of inflation has definitely stepped up quite significantly in
quarter two.

HELEN BROWN: The Federal Opposition says the figure proves that some families are finding it tough.

WAYNE SWAN, SHADOW TREASURER: I think what these figures show is that household budgets are very
stretched.

HELEN BROWN: Trade unions say the recent decision to raise the weekly minimum wage by about $10 is
clearly out of step with the cost of living.

JEFF LAWRENCE, ACTU: Government policy needs to address this and certainly the Fair Pay Commission
decision did not actually provide appropriate compensation for Australian workers.

HELEN BROWN: The job of the Reserve Bank to keep inflation under control could be further
complicated if there's more financial stimulus, for instance, if the major political parties decide
to woo taxpayers with election promises that put more money into the economy.

CHRIS RICHARDSON: Because this is an election that will be fought to the death both sides will be
very tempted to spend what is still a big surplus.

HELEN BROWN: The Reserve Bank Board meets in two weeks time to deliver what is now a highly
anticipated decision. Helen Brown, Lateline.