TRANSCRIPT
OF
THE HON PETER COSTELLO MP
Treasurer

Interview with Kerry O’Brien

7.30 Report

Wednesday, 3 December 2003

 

SUBJECTS: Interest Rates; Inflation; Housing; Mark Latham; US Alliance

O’BRIEN:

Peter Costello, we all know that the Reserve Bank is independent and the Howard

Government has set it up that way, that presumably leaves you free to talk about

interest rates without influencing the Bank? So, do you agree that interest

rates should have gone up today?

TREASURER:

Well Kerry, the Government reserves the right to talk about interest rates

and about the economy generally. Quite right about that. I have had a practice

of not putting my own views on monetary policy out there because I think it

can cloud or confuse the issue. The way I…

O’BRIEN:

(inaudible).

TREASURER:

Well, because people might think that you know I am trying to put a further

direction in relation to interest rates or people overseas might think that

the Government is somehow intervening.

So I have had a practice of not doing that. But what I can comment on is the

situation of the general economy, and I think some of the factors that the Bank

referred to today, I would agree with, that is that the economy is showing signs

of strengthening, the world economy is picking up, some of the factors I am

not quite so sure about, that the Bank also remarked upon.

O’BRIEN:

Which ones?

TREASURER:

Well Kerry, the inflation issue I think is an interesting issue. I don’t

see any sign of inflation breaking out in Australia, in fact, I think inflation

is not only within the band but is going to decline over the course of 2004-05.

I think that the Bank shares that view but it wanted to make a point that some

of this would be influenced by the exchange rate. I am not sure even if you

take out the exchange rate effects that inflation is posing a serious risk at

the moment. The Bank referred to it as one of the factors in its decision.

O’BRIEN:

So you don’t think the economy is in danger of overheating?

TREASURER:

No, I don’t think the economy is in danger of overheating. Look, we had

National Accounts today, and the growth was 1.2 per cent. Okay, that’s

pretty strong for the quarter. But we are forecasting growth of three and a

quarter at our Budget time. We know that the Australian economy can grow at

4 per cent without inflation taking off. We did it for a number of years, so

I don’t see a risk of overheating, no.

O’BRIEN:

I noticed in their statement today that the Reserve Bank made absolutely no

statement, no comment about the housing market, which we know has concerned

them in the past. But do you think that is still a factor driving the situation?

TREASURER:

No.

O’BRIEN:

Because if inflation is not a concern, what is driving it?

TREASURER:

Well, if you read the statement carefully, and obviously I do, the Bank’s

view is that the Australian economy is strengthening and the world is coming

back. The world has been in a downturn, America has been in a recession and

it believes that with the world economy coming back and Australia strengthening,

there is no need to have what it calls stimulatory monetary policy. Now, that’s

the reason. Now, you asked me about the housing market, interest rate policy

is not directed at house prices, is not, never has been, never should be. You

don’t…

O’BRIEN:

And yet the Reserve Bank has talked, Mr Macfarlane has talked more than once

about his concerns about the housing bubble, about the over-heated Sydney housing

market in particular.

TREASURER:

But you don’t, you don’t set interest rates to try and get some

kind of level of house prices, it is too blunt an instrument. This is an instrument

that affects the whole economy, farmers, business, it can target inflation because

that is economy wide, you don’t target housing markets and this…

O’BRIEN:

But isn’t that exactly what they did with the last rate increase?

TREASURER:

…no, and this point was made explicitly by the IMF recently in its report.

Interest rates don’t target house prices.

O’BRIEN:

But that, Mr Macfarlane, the Governor of the Reserve Bank, has gone out of

his way more than once to express his concern about it, and when he did raise

his interest rates last time, surely that was a factor.

TREASURER:

Well, I think, as I said last time, when I was on your program last time, that

the most significant factor in last month’s decision, again was a strengthening

economy and you will see that that is what I have said. All of the international

agencies, the IMF in particular will say, you don’t have interest rates

targeting house prices, that is not, that is not a function of monetary policy,

it is not part of our agreement, our agreement is to use interest rates to target

inflation.

O’BRIEN:

You have said now, that you agree with part of what the Reserve Bank lays out

as its rationale for increasing interest rates this time, but you don’t

agree with all of it, that implies at least that you don’t think that

this was a time to increase rates.

TREASURER:

I am not second guessing the bank Kerry, I said that. You asked me what I thought

of the statement, I agree with the fact the economy is strengthening, I don’t

think inflation is a problem, I think if you look very carefully at what the

bank has said about that, really I don’t think it sees an inflationary

risk either in the medium term, certainly not in the next 12 to 18 months either.

O’BRIEN:

Well, look, try to cut through this, for the broad Australian public that really,

I would think would want to understand exactly what the Government’s position

is on this, the Reserve Bank’s independent, do you believe that the Government

has been, is it the Reserve Bank has been right in increasing rates this time,

or do you think they were only partly justified in it?

TREASURER:

My view is this, the bank is independent, it has made its decision, we analyse

its grounds, we have maybe a difference of perspective on some of the economic

factors, but that is a matter for the bank to explain its decision, it is not

our role to do so.

O’BRIEN:

Well, political leaders history will tell us, you usually need a modicum of

luck to be successful in their career. How lucky is Mark Latham, within his

first 24 hours as leader to see you suffer, and this country suffer the second

interest rate increase in a month, today?

TREASURER:

Well, I think Mr Latham was probably lucky to be elected, I think he is lucky

to have got to the leadership of the Labor Party without having any experience

at all. He has never had…

O’BRIEN:

He has been in the Parliament 10 years, he has been on the front bench and

the Shadow Treasury portfolio…

TREASURER:

…he has never been in Government, and I watched him very carefully when

he was Shadow Treasurer, he never produced a policy, and most of the things

that he called policies were revoked or overruled in one way or another, so

I think he is very untried, very untested and that…

O’BRIEN:

…when you were Deputy, when you were elected with the so-called ‘dream

team’ with Alexander Downer as Deputy Leader in Opposition, you hadn’t

been in Government and hadn’t had that experience, I mean, surely there

are many people elected to Opposition Leader who haven’t had experience

in Government, is that the measure?

TREASURER:

Well, I think the Labor Party is putting Mark Latham forward as an alternative

Prime Minister. Now, bear this in mind, if Labor were elected to Government,

he would presumably, want to go to the White House and discuss the American

alliance, and I think a lot of people should be very concerned about the views

that he has expressed on the American alliance.

O’BRIEN:

I notice that the US Ambassador rang up and congratulated him.

TREASURER:

Of course he would, because that is the job of an Ambassador, to try and mend

fences. But, can you imagine Kerry, what the view of the American Administration

would be? We know Mr Latham’s views about President Bush, because he re-affirmed

them today, what I would find more interesting frankly, is to know what President

Bush’s views were on Mark Latham.

O’BRIEN:

Is that important?

TREASURER:

Well if you want to deal on the world stage, with world leaders, I think it

would be important.

O’BRIEN:

So, Labor has now made its generational change, whether it is age generational

change or political generational change, how about your Party?

TREASURER:

Well, the leadership of our Party is a matter for our colleagues, obviously,

and during the course of this year we have had various discussions on that,

John Howard has indicated that he is leading to the next election.

O’BRIEN:

Yes. You don’t think your party is ready for generational change, or

needs generational change yet?

TREASURER:

Well, our party I think has got some talented people on its frontbench, and

I think they all offer great opportunities for the Party, not just one, there

are numbers of talented people, and they are making a great contribution and

in future years, I am sure they will continue to make great contributions.

O’BRIEN:

Increasingly so. Peter Costello, thanks for talking with us.

TREASURER:

Thanks very much Kerry.