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Wednesday, 20 March 1985
Page: 578

Mr HOWARD —My question is addressed to the Treasurer. I refer to the honourable gentleman's claim made recently that the pre-election commitments of the Prime Minister and him that interest rates would fall in 1985-which produced the sort of headlines I have here-related to the post-tax rundown period in 1985. I therefore ask the honourable gentleman whether he is now predicting that once the current rundown period has been completed housing and other interest rates will fall below the levels which obtained at the last election. If not, what prediction is he now making?

Mr KEATING —This is an interesting question from the high interest rates specialist who has the dubious honour of being, I think, the only Treasurer in this country to preside over 20 per cent plus interest rates. I might add that he has been saying now for weeks that the Government's monetary policy is too lax. He has been running around the financial markets spreading his particular brand of poison, saying that I invite him to believe that the authorities continue to maintain a firm monetary policy. Yet in the same breath he acknowledges that the monetary aggregate cannot provide a reliable guide to current conditions. He says that if monetary policy is being kept firm one is entitled to ask: Where is the evidence?

On the one hand he is saying that this Government is too soft on inflation. It has got inflation down to only 5 per cent. He says that what we really need is a tight monetary policy. He thinks we need to be as pure as the driven snow in respect of monetary policy. On the one hand he is saying that we need to tighten the money supply and push up interest rates; on the other hand he is saying that interest rates are too high and rising, as though this is some sort of an atrocity. He is saying that we have a lax monetary policy and he is extolling to us the virtues of a tight one.

Let us get this on the record. At the moment the money supply is running at 3 per cent over the top of the Government's target range announced last year at the time of the Budget. The Government suspended the monetary target because of the changed relationship between the monetary aggregates and gross domestic product because of the reintermediation and intermediation taking place in the banking system owing to the Government's policies in respect of deregulation. I might add that they are policies which the former Treasurer always wanted to implement, as he always wanted to implement everything.

The former Treasurer is suggesting, and has been for weeks, that we should chase the 13 per cent monetary growth down to 10 per cent. That means taking about $2,200m out of the system between now and June. One can just imagine what kind of credit squeeze Australia would have and what kinds of interest rates we would have to live with if we tried to take $2,200m more out of the tax rundown. Why is the tax rundown tight? It is tight for two reasons: The first is the financing of the tax payments on the enormous pickup of profitability of Australian business occurring as a result of this Government's policies. The other reason is the float of the dollar, which again the former Treasurer wanted to do but never had the guts, the courage or the strength to push through his Cabinet. Because of the float there is no longer reliance upon capital inflow to satisfy tax requirements. Hence there is seasonal pressure on interest rates at this time of the year. No one has ever denied that. I made that clear when I said in the election campaign that I accepted the view of most market commentators that a further interest rate step fall is ahead of us when we get through the tax rundown period. The honourable member asked me about that a week ago. I have nothing further to add to the answer I gave him a week ago.