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Deputy Governor's criticism

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Peter Reith



The Deputy Governor of the Reserve Bank of Australia, Mr John Phillips, today lobbed me grapeshot across the bow of the new Treasurer, his failed predecessor, and the Loony Left by saying that breaking the stick of inflation was not enough.

In a speech to CEDA, Mr Phillips, said:

'...So, breaking the stick is not necessarily the end of the matter."

A comment like that from the Deputy Governor of the Reserve Bank after months of Keating rhetoric on the Government's determination to 'break the stick of inflation' can only be seen as very pointed criticism indeed.

At the very legist, it is a salutary reminder to the Government that a lot more needs to be done to ensure that Australia regains the status as a low inflation country that we enjoyed during the 1960s.

During a speech to CEDA, Mr Phillips made specific reference to some recent suggestions that the costs of achieving a very low inflation rate may be too much for the community to bear.

Essentially, Mr Phillips dismissed this suggestion (which the Government uses to justify its own failure to nominate a target) by saying he believed the costs of not achieving a low inflation rate were even higher.

The Deputy Reserve Bank Governor said:

There is no doubt that the costs of achieving a low inflation rate can be high particularly if monetary policy is the main weapon and the effort is directed over a short time span. But the costs of not reducing inflation are also high. In the long run, I believe, they are higher.'

The Deputy Governor's speech was a nice pay-back to the failed Treasurer.

Mr Phillips threw bureaucratic subtlety out the window, by virtually describing the former Treasurer, Mr Keating, as 'Mickey Mouse in the role of the sorcerer's lazy apprentice.*

Significantly, the Deputy Governor points out that it is hardly surprising that inflation should be falling at present with the country in the grips of recession.

This point has been raised by the Opposition on numerous occasions in recent times, only to be denied by the Government. .

In four major episodes over the past 30 years, Mr Phillips said, inflation fell significantly when economic activity contracted. And he produced a graph that showed there was a 6.4% fall in the CPI as a result of the 1982-83 recession-something Prime Minister Hawke and the former Treasurer, Mr Keating, have been loathe to admit.


Mr Phillips warns that the lower inflation that has come with contracted economic activity in the past has nearly always been surrendered in the next upswing.

Mr Phillips said:

"We have to guard against that happening again. Recent events illustrate just how fragile expectations can be."

That is the very point the Opposition has been making.

Namely, that the Government has achieved 4.9% inflation, not through a specific anti-inflation strategy, but rather as the only benefit of its over reliance on high interest rates, and the resultant recession.

And even now, while Mr Hawke is prepared to accept the plaudits for the falls in the CPI, the Government still doesn't have a specific strategy in place that is going to ensure inflation doesnt bounce up again as soon as economic activity picks up.

As detailed in the past, the Coalition believes the only credible anti-inflation policy for Australia must feature the scrapping of the accord, genuine enterprise bargaining and the provision of greater independence for the Reserve Bank of Australia.

The arguments that the Deputy Governor put forward in his speech today are implicit support for the Coalition's genuine commitment to an inflation target of between 0% and 2%.

13 June 1991 Somerville

Contact: Peter Reith (059) 777212 D82/91