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Reserve bank backs price stability objective



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John Hewson Leader of the Opposition M e d i a R e l e a s e

202/91 22 August 1991

RESERVE BANK BACKS PRICE STABILITY OBJECTIVE

The Reserve Bank Annual Report released today supports the Coalition's view that price stability is a realistic and

desirable objective.

And that price stability should be the main focus of policy for the Reserve Bank.

Speaking of the damage done by inflation, the Report states:

"Living with high rates of inflation, out of concern for the costs of reducing it, is not a feasible policy. The longer term costs of accepting high rates of inflation are substantial. They include the way inflation perverts the taxation system and the pattern and financing of investments, and the way income and wealth are redistributed in favour of those best placed to take

advantage of those distortions. Such outcomes make Australians poorer than they would otherwise be. For its part, monetary policy can best contribute to growth and equity by maintaining a clear medium-term commitment- i-o price «tahilitv. ■ (underlining

added).

In the process the Report highlights a major weakness of the Government's policy strategy. In particular, the Report highlights the damage which is being done by the Government's purely political refusal to commit policy settings to price

stability.

"To reduce inflation in a structural, permanent way - as distinct from a temporary, cyclical improvement - requires the prevailing inflation psychology to be fractured. If expectations of future inflation remain high, this will feed into actual prices and wage costs."

The continuing refusal of the Prime Minster and the Treasurer to make a medium-term commitment to price stability and an

associated commitment to the structural change and labour market policies which would achieve that goal are holding up

inflationary expectations (indeed, they have added to that concern by promising a 6.5 percent increase in average wages as part of yet another secret "deal" with the ACTU over wages and the promised introduction of a costly payroll tax to finance

superannuation).

That, in turn, means that real interest rates are being held higher than they need to be, thus jeopardising the recovery which they have promised.

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Investments simply will not pick up until real interest rates are lowered significantly.

Indeed, the irony is that the Government's failure to commit to price stability and the policy changes that go with that

commitment, mean that Mr Hawke is condemning us to a long period of slow growth as inflation is ground out of the economy through the pain inflicted on the hundreds of thousands of unemployed.

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