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Press Conference

Parliament House, Canberra

28 January 2009

SUBJECTS: CPI; Global Financial Crisis; Economic Security Strategy; Inflation; Australian Business
Investment Partnership

TREASURER:

Well, thanks for coming down today. I just wanted to deal with the December quarter CPI data and
then, of course, I'll take your questions.

Today's inflation data for the December quarter shows headline inflation easing to 3.7 per cent and
the underlying inflation rate easing to 4.3 per cent. Now, of course, these numbers are a timely
reminder of the impacts that the global recession and, of course, falling commodity prices on the
Australian economy.

And in particular, this figure today reflects the sharp fall in the international price of oil,
which of course has meant that Australian motorists have seen lower prices at the bowser.

Let's just go through the figures briefly.

The CPI fell by 0.3 per cent in the December quarter to be 3.7 per cent higher through the year,
down from 5 per cent over the year to the December quarter.

The average increase in the RBA's measures of underlying inflation was 0.7 per cent for the
quarter, taking the annual figure to 4.3 per cent, down from 4.7 per cent.

The fall in the CPI in the December quarter was mainly driven, as I said before, by a sharp fall in
petrol prices which fell by 18.2 per cent in the quarter.

Of course, petrol prices, as we all know, have fallen from about an average of $1.50 in the
September quarter to around $1.25 in the December quarter.

The fall in fuel prices took 0.9 of a percentage point off inflation in the December quarter which
has been partially, of course, offset by some increases in housing and food prices.

So, I think it's now clear that inflation in Australia is subsiding, as it is of course around the
world, and it's subsiding in response to the global financial crisis which is slowing growth
dramatically in the global economy. And of course, what we now see is a global recession, and
you've seen the impact of that most notably on China and, of course, Chinese growth forecasts.

We domestically are seeing the unwinding of the mining boom and, of course, as that occurs, both
the UK, the US, Japan and the Euro-zone countries, are all in recession. So, I think we can expect
to see internationally global growth forecasts yet again revised down.

Now, in the middle of all of this, there are underlying strengths in the Australian economy - a
point that I made very strongly at briefings I gave to investors in New York at the end of last
week.

Our banking system is stable, among the most stable of all advanced economies, and of course, this
is the case at a time when many international banks are in serious strife.

Of course, we as a country have more room to move when it comes to fiscal and monetary policy than
most other developed countries in the world. That's the reason why back in October the Government
took decisive action to put in place an Economic Security Strategy.

Now, I note that there's been a bit of debate about the impact of that Strategy, and I'm sure we'll
all look at the data as it comes out over the next few weeks. But I think it has had a beneficial
impact in terms of consumption. I think you have seen some figures released today by one of the
major retailers which points to the fact that consumption of many basic items was very strong in
the December quarter. But we will await that data.

I'd just like to make this point: that the Government stands ready to take whatever action is
required, in a responsible way, to respond to these rapidly changing global conditions.

I'll leave it there. Over to you with questions.

JOURNALIST:

This is rather a brutal way of getting inflation down, isn't it?

TREASURER:

We made it very clear in the Budget last May that there was a need to strike a balance between
inflationary pressures in the Australian economy on the one hand, and the uncertainty then in terms
of the global growth outlook, which is why we then said - and it wasn't accepted by a lot of people
at the time - there was a need to strike a balance between fighting inflation on the one hand, and
building up a buffer against the international uncertainty that was then rearing its ugly head. And
we did that. Inflation is not a good thing for an economy and there are many things that we need to
do for the long-term to continue to reform our economy, including attending to capacity constraints
to make sure we don't suffer from the sort of inflationary surges that we've seen in recent years
in this country. And of course, inflation at that time was then fed by a very significant increase
in the price of petrol.

But in the middle of last year the global economic environment just changed absolutely
dramatically, and the balance of risk globally as well as here changed from fighting inflation on
the one hand, to supporting growth and jobs on the other. And of course, as we've moved through the
Christmas period the importance of that has just increased all the more.

The sort of data we are now seeing internationally for the December quarter in terms of many
developed countries is very stark, very stark. The premium now is to support growth and to support
jobs. This Government puts an absolute emphasis on supporting growth and jobs.

JOURNALIST:

In light of that, can you afford to wait until May to stimulate the economy further?

TREASURER:

We said that we'll take whatever action is required. We are looking at all of the international
material as we speak. That's one of the reasons why I was in New York last week. Data is now
emerging from around the world. You will recall, Paul, that we've had conversations in this room
over time where many things that we talked about then have changed dramatically in a short space of
time.

Earlier in the year, for example, it was generally assumed by many international policy makers that
there'd been a decoupling between the United States on the one hand, and growth in countries like
China on the other. What the global financial crisis has demonstrated, and the global recession
that has come with it, is that that decoupling never occurred.

We are all linked together in this and the transmission of problems in large countries in
particular, like the USA or in Europe, the transmission of those problems elsewhere to the globe is
much more dramatic and direct than many of us had ever assumed in recent times.

JOURNALIST:

Treasurer, part of your stimulus package late last year was increasing the First Home Owners Grant.
How much has it actually worked to undermine inflation by pushing house prices up?

TREASURER:

I don't think it's done anything of the sort. What it has done is that it has certainly given a
significant boost to first homebuyers, but elsewhere in the construction industry there is rapidly
increasing spare capacity. I don't think it would be fair to say that there are significant
inflationary pressures in the housing sector at the moment.

Indeed we've had another conversation about construction in another context: supporting the
construction industry, boosting it and boosting demand generally, of which construction is a
significant part. It is a very high priority for this Government.

JOURNALIST:

Treasurer, was the proposal for Rudd Bank run past the Council of Financial Regulators? What was
their response?

TREASURER:

Well, it's not a bank. Let's just get the terminology correct. It's actually a special purpose
vehicle, and the report that I've read today that the Reserve Bank Governor expressed reservations
is simply untrue. The Reserve Bank Governor has done no such thing, and my office was not asked as
to whether the Reserve Bank Governor was expressing reservations or not. He did not. We've had
extensive discussions with the Reserve Bank about a whole range of issues over a long period of
time, and I don't intend to go into the individual detail of all of those discussions. For example,
there was a long discussion last week between the Reserve Bank and the Government, the Prime
Minister and myself. I'm not going into the details of those.

What I will say most emphatically is that the Reserve Bank Governor did not express any
reservations about the special purpose vehicle, has not expressed any reservations about the
special purpose vehicle, and that story this morning is incorrect and if we'd been asked about it,
we would have said that.

JOURNALIST:

Treasurer, would the SPV, to use that acronym, run past the...

TREASURER:

There have been discussions between the Government. There have been discussions, as there would be,
between the Government and the Reserve Bank on that and many other issues. Look, at the end of last
year I think I made the remark that at that stage I was spending more time with the Reserve Bank
Governor and other regulators than I was with my wife, and it remains the case. Apart from
Christmas, that's probably the way it's going to be this year as well. I'm certainly spending a lot
of time with senior colleagues.

JOURNALIST:

Treasurer, the inflation rate is still outside the Reserve Bank's band scale...

TREASURER:

It is.

JOURNALIST:

You've had discussions with the Reserve Bank. Do you expect that inflation is still a problem? That
there's still more work to be done?

TREASURER:

I think inflation is definitely moderating and it is not the economic challenge in the short-term.
Supporting growth and jobs is. But for the longer term it still remains the case that there's an
imperative for us to reform our economy, to lift our productive capacity, to lift our productivity
so that when growth returns, we don't get the sort of inflationary pressures build in the way in
which they built in the last couple of years. So, it certainly remains a high priority in terms of
our medium term fiscal strategy to deal with inflationary pressures in the economy. But inflation
is certainly moderating - the Reserve Bank sees it that way, it stated that publicly in its last
Statement on Monetary Policy - and we do see it moderating as well.

JOURNALIST:

So, is there an opportunity, Treasurer, you mentioned capacity constraints before, is there
actually an opportunity in the current slowdown to address, I mean people have talked a lot about
infrastructure but referred to the skills issue, as capacity becomes available?

TREASURER:

We've made it clear that we will continue to pursue our agenda of investing in people - it includes
training, lifting our productive capacity, most specifically when it comes to infrastructure, and
the extent to which we can accelerate doing those things in this environment, we will. But some of
those issues are medium and longer term, and we will try and deal with the here and now, what's
just down the round as well as the medium and longer term. We won't be diverted from continuing to
pursue those agendas.

JOURNALIST:

Treasurer, if bad lending practices by international banks pumped up the price of commercial
property values, what's the Government's reason for that, helping to keep them high? Wouldn't it be
(inaudible)?

TREASURER:

Well, I just don't accept that characterisation of what we're doing with the special purpose
vehicle and I don't accept that our commercial property sector is exhibiting any of the bubbles
that have been seen in other countries either.

One of the great strengths of Australia, particularly in our housing market but to a lesser extent
it may apply to commercial property, is that its fundamentals are much sounder here than they are
internationally, and that is a great strength for us.

The fact that we've got room to move more extensively on monetary policy is also an extensive help
to this economy and does distinguish us from others.

The problem we've got is that there is a problem in the international banking system which will
mean, could mean, and I say could, could mean that some international banks who have supplied
capital to profitable commercial property investments in this country may have to withdraw, not
because the investment isn't profitable or worthwhile, but because of international conditions. And
all our vehicle does is to provide a measure of support to fill that gap, to support profitable
investments here, and if that doesn't happen jobs are under threat.

JOURNALIST:

Mr Swan, there's been a reasonably (inaudible).

TREASURER:

Which one sorry?

JOURNALIST:

Strathfield are going into voluntary administration today. How many more of these events can we
expect to see as the global financial crisis...

TREASURER:

Well, it's irresponsible to speculate about how many more of those we would see. Look, when you
have such a dramatic slowdown in global growth, such a shock to global confidence levels, then it
really impacts upon demand. Most particularly, it impacts upon consumption. That's why we moved so
quickly in October to boost demand in the Australian economy, and given that there has been a
further slowing in global growth, we've got to evaluate the implications of that for future policy.

JOURNALIST:

Mr Swan, with that further slowing of growth, for weeks you have been saying now that the
Government does stand ready to take action. What gauge or what benchmark are you using to decide if
and when to unleash a second stimulus package before the May Budget?

TREASURER:

Well, we've just returned from Christmas and much of the early data, both global and domestic, is
just about to arrive. As I said to you before, there is the material in from Woolworths - I'll just
see if I've got it here, no I haven't got it - the material from Woolworths that came through today
about there being a reasonably strong increase in the December quarter of basics across their
stores. Other feedback that I've had from other retailers indicates that the economic security
package in December did have a beneficial impact. We've got to evaluate all of that. We've got to
look at that in light of what's occurring internationally and what other governments are doing.

JOURNALIST:

But what timeframe?

TREASURER:

We're not going to speculate about timeframes. But one of the things that this Government does is
that it gets ahead of the game.

JOURNALIST:

Is there a scope for a further loosening of monetary policy in light of these figures?

TREASURER:

Well, Paul, I don't speculate about decisions the Reserve Bank may take.

JOURNALIST:

Would tax cuts be a good way to (inaudible)?

TREASURER:

I've said repeatedly, since last October, that I don't rule any particular measure in or out. What
will govern our decision-making will be what's responsible, what is timely, what can be delivered
in a sustainable way and how it deals with what are rapidly changing global conditions. Thank you.