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Melbourne, Wednesday 2 February 2000, 12.00 noon: transcript of doorstop [interest rates; economy; petrol excise]



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Press Release

Treasurer

 

 

Transcript No. 2000/07

TRANSCRIPT OF 

The Hon Peter Costello MP 

TREASURER

Doorstop 

Melbourne 

12.00 noon 

Wednesday 2 February 2000

SUBJECT: Interest rates, Economy, Petrol excise

TREASURER:

Well, as you know this morning the Reserve Bank announced its intention to intervene in the market and to lift official interest rates by 50 points to 5.5 per cent. Obviously what was on the minds of the Bank when it made its decision to that affect was particularly developments in the international economy. And you have seen as the world economy begins to gather pace and people become more optimistic about world economic developments, the central banks around the world have started moving as the Reserve Bank notes in its statement, and the US Federal Reserve has tightened policy by 75 basis points in the last six months. The Bank of England has tightened policy by 75 points in the last six months, New Zealand’s tightened by 75 points in the last three months. And there are many people that expect the US Federal Reserve to again tighten policy overnight, and I guess we’ll know about that by tomorrow.

Let me say, that the strengthening world economy is in the short, medium and long term a good thing for Australia because what it means is that as the world economy strengthens there will be greater demand for our exports, that will be good for economic growth in Australia and that will contribute to jobs growth. And the task in Australia at the moment is to ensure that the growing economy, and the economy’s been growing at about 4 per cent for the last four years, is maintained. If we could maintain growth in Australia at 4 per cent, that would be great for job seekers, it would mean that we could continue employment growth at 2 per cent or more, and it would mean that we would make even larger inroads into the unemployment rate and provide more jobs for people who want to work. The Reserve Bank also notes in its statement, I think this is a very important warning, that it’s important that wage demands are restrained. The Bank notes in its release that there are developments on the wages front which, and these are my words, if they were to continue could have effects on inflation and that is one of the reasons why the Government calls on people, particularly in the building industry - both employers and employees, to exercise restraint. The task for economic policy at the moment is to continue the growth in the Australian economy. 4 per cent growth over the last four years has led, since the Government was elected, to over 624,000 new jobs. And if you’ve got continuing 4 per cent growth over the next four years and continuing employment growth, you would make huge inroads into unemployment. And that is the task of economic policy to keep a strong rate going which will provide more jobs for the Australian public.

JOURNALIST:

Treasurer, last week the Prime Minister said there was no need for a rate rise. Does this show that Treasury and Cabinet are out of step with what the Reserve Bank is thinking on monetary policy?

TREASURER:

Treasury?

JOURNALIST:

Yes, the Reserve Bank saying, that there is a need for a rate rise and the Prime Minister last week saying, there is no . . .

TREASURER:

Well, I don’t think Treasury said anything. The Prime Minister last week made the comment that the Australian economy was not overheating, and that’s also a comment I made, and I think the Reserve Bank made it in its statement today. I think the Reserve Bank completely agrees with that. In fact, as I recall in its statement, "the tightening like its predecessor in November can be viewed as pre-emptive in that it has occurred before overheating has emerged", so the Reserve Bank also takes that view. The comments that I made last week were, that obviously what had changed in economic understanding was that the world economy was stronger and I think you’re seeing a lot of that reflected in this particular statement. The Reserve Bank is an independent bank and it makes its own decisions. I think it’s no surprise that it tightened interest rates today. If there was any surprise it was whether it was going to be 25 or 50 basis points. As I say, in the climate where the US central bank tightened by more, the Bank of England tightened by more, the New Zealand Bank had tightened by more, that was obviously something that was very influential in its thinking. But it’s issued a statement as to what its reasons are, largely referring to the international economy, they speak for itself. From the Government’s point of view, the Prime Minister’s point of view, my point of view, it confirms our assessment that the economy’s not overheating, that you haven’t seen signs of overheating, but the Bank took the view that this could be, as it says, a pre-emptive step which would continue the economic growth that we’ve seen in the past.

JOURNALIST:

Were you surprised that it was 50 basis points as opposed to 25?

TREASURER:

There was a lot of argument as to whether it would be 25 or 50, and there were arguments both ways and I followed the debate pretty closely.

JOURNALIST:

Do you agree now that there is going to be inevitable wage pressure?

TREASURER:

Well, I call on both employers and employees to exercise restraint. There are obviously large claims out there at the moment, particularly in the building industry and particularly in Victoria. Now I make this point, that if unions are successful in some of those large claims then that will naturally have an effect on inflation and that will naturally have an effect on interest rates. One of the things that we’ve been able to do, one of the reasons why we’ve been able to run a low interest rate policy in Australia is because we’ve had a low inflation rate and because we’ve had moderate wage claims. Now, wage claims are now increasing. If employers give into those wage claims and if the claims continue to be made, that would not be a good development. It calls for restraint on both sides.

JOURNALIST:

Don’t you think there’s some justification now, given two rate rises within three or four months of each other?

TREASURER:

Well, the CPI, the Consumer Price Index, is below 2 per cent. So, if you wanted to maintain the value of wages, you would be looking at a 2 per cent rise. If you wanted a real wage rise based on a productivity improvement, you might be looking at 3 or 4. But I’ve seen claims that are of the order of 24. Now a wage claim of 3 or 4 per cent is consistent with a low inflation outcome, but a wage claim beyond that is not. And if employers were to accede to those claims, and if unions were to make them, that would not be a good development for the economy.

JOURNALIST:

Mr Costello, regional Australia’s come in, the Government’s come in for a lot of flack from regional Australia recently. Your backbencher, David Hawker, says this interest rate will do nothing to help regional Australia. Your reaction?

TREASURER:

Well, as I said, I’m the Treasurer and I speak on behalf of the Government. And the Government’s view is that it is important that we continue the momentum of economic growth, that’s the best thing you can do for the nation as a whole. We actually support a low interest rate policy and although rates have increased by 50 points today, your mortgage interest rate, as I would expect, will probably move into the sevens, is still lower than the average mortgage interest rates of the nineties, the eighties and the seventies. So, we are still comparatively low and if the wage pressures are kept under control then we can continue to run good inflation and good interest rate outcomes.

JOURNALIST:

Is 50 basis points too much though?

TREASURER:

Look, there was a lot of argument, I think, between those that were in the 25 school and those that were in the 50 school and I think the Bank, for the reasons that it’s put out in its statement speak for themselves, wanted to make sure that it was taking a pre-emptive move.

JOURNALIST:

What’s your view, do you think it was . . .

TREASURER:

Well, I don’t, I don’t offer a second commentary mirroring the Bank for obvious reasons.

JOURNALIST:

Do you see this as it being a decision as a hedge against what’s happening overseas?

TREASURER:

Well, the point that’s made in this statement, and the statement speaks for itself, is, that in most countries central banks are increasing rates. The US has increased rates by 75 points in the last 6 months, many people believe it’s going to increase rates again tonight. Now, I’m not making my own forecast but many people believe it’s going to increase rates again tonight. The Bank of England has increased rates by 75, and the Reserve Bank of New Zealand has increased rates by 75, so why are those banks doing it? Well, they’re doing it because the international economy is now stronger than people believed. I think I was at the IMF annual meetings back in September and there were then tentative views that perhaps the worst of the Asian financial crisis was over. I was at the G20 meeting of the 20 Finance Ministers, central bank governors in Berlin in December, and there was a lot more optimism. And I think if we, at the next meeting we’ll have would be at the IMF in April, and I think every country in the world, probably would have revised up its growth forecasts by then. But what’s happened is that the world has come through the biggest financial collapse of our time - Asia. There is now optimism that not only has Asia bottomed and recovered, but the world economy is stronger. And in particular, that is led by the US which had an exceptionally strong growth figure on Friday and its central bank, well, is meeting as we speak.

JOURNALIST:

Treasurer, the Reserve Bank said in its statement that the 50 basis point rise was meant partially to signal to the market that policy is now neutral. Should home owners be relieved that we’re not going to get more rate hikes if policy is neutral?

TREASURER:

Well, it used the interesting expression, didn’t it, that policy’s been moved to a neutral stance. And I think what it was trying to say there was, that whereas you would expect an accommodating policy during the period of the Asian financial crisis, with the world now not being in a crisis state as it was during much of ‘97 and 1998, that they want to get back to neutral. That’s what they say, their terminology.

JOURNALIST:

Treasurer, Kim Beazley is blaming the rate increase on what he says is the inflationary pressures posed by the GST. What do you say about his assessment?

TREASURER:

Well, it’s silly and desperate, isn’t it? Here we are, the Reserve Bank publishes the reasons for its rises. We’ve got tightening monetary policy in the US, and the Bank of England, New Zealand which is obviously influential, Mr Beazley says, that it’s the result of tax changes which haven’t taken effect. Presumably, Mr Beazley will be arguing that the US Federal Reserve is tightening US interest rates because of the Australian GST. And the Governor of the Bank of England, Eddie George, is sitting down tightening English interest rates because of the Australian GST. I fully expect if there’s an earthquake next week Mr Beazley will probably claim that’s a result of the GST. These are silly and desperate comments, but I guess if you don’t have policy you get into that kind of parrot-like response. But you might ask Mr Beazley, why the US is tightening rates in the light of the Australian GST? It might actually be a good question if you could get some Labor Press Sec to turn up in Washington and ask why Dr Alan Greenspan is moving US interest rates on the back of the Australian GST.

JOURNALIST:

Why has the Government increased petrol taxes?

TREASURER:

The Government hasn’t increased petrol taxes. What happens is that the excise arrangements are indexed by arrangement that were put in place by the Labor Party in 1983, and as a result excise is moved in line with the Consumer Price Index. And that’s the situation that has applied for 18 years, for 18 years in Australia. And can I say, during the period of the Labor administration which put it in place in 1983, the CPI was increasing on average 5 per cent a year, and that was feeding into the excise. It’s only in the last four years when the CPI has been 1 per cent, that the motorists have got a much better deal out of that arrangement. The last four years have given a much better deal than the previous 14.

JOURNALIST:

When the GST comes in will the prices go up again for fuel?

TREASURER:

What we’re doing in relation to GST is we’re reducing excise, we’re then applying GST, and the consequence of that is, and I noticed in all of the press commentary and the commentary made by some of the motorists organisations today, they didn’t say this, that for business because they get all GST back, petrol becomes 10 per cent cheaper, and for transport costs for trucks, the petrol excise, which is currently about 43 cents a litre falls to 20. So in relation to rural transport costs, the excise halves. This is the first time there have ever been reductions that will apply in relation to business use of petrol and heavy truck excise from 1 July. Now, you know, people are entitled to always look on the bad side, but I would’ve thought that those points could have been made in the discussion.

JOURNALIST:

Treasurer, can I have a comment on Cheryl Kernot’s reappearance this morning?

TREASURER:

What particular aspect?

JOURNALIST:

Just that she’s reappeared.

TREASURER:

Oh well, look, I wish her well. I hope that she can return to her duties. We’re looking forward to seeing her back in Canberra. I don’t wish anyone illness or bad health. And if she’s over her illness and her bad health I, you know, hope she can return to duties and I hope the Labor Party gives her the support that she deserves.

JOURNALIST:

(inaudible)

TREASURER:

I’m not interested in hair colours, I’m more interested in hair preservation at my stage of life, to keep what you have, whatever colour it is. Thanks.

 

 

jy  2000-02-04  12:15