Press Conference

Treasury Place, Melbourne

Wednesday, 25 October 2006

12.30 pm

SUBJECTS: CPI, Iraq, Pacific Islands Forum

TREASURER:

The Consumer Price Index rose 0.9 per cent in the September quarter to be 3.9 per cent higher through the course of the year.  The effect of increases in fruit added around about a third of that increase.  Fruit rose 20.5 per cent and that was led by bananas again.  The banana price averaged $2.50 a kilogram in the March quarter, averaged $9 in the June quarter and averaged $13 in the September quarter. 

Fuel, which had added to the Consumer Price Index in the previous quarter, did not add in the September quarter.  In fact the fuel price in the September quarter averaged $1.31, this is the All Capitals average price per litre – $1.31 – compared to the June quarter of $1.33.  The good news is, in the month of October the average All Capitals fuel price was $1.14.  That is, fuel prices are falling and if they maintain that price over the course of the December quarter, that will actually detract from future CPI indexes. 

Having said that, the overall result excluding the volatile items of fuel and fruit was a 2.7 per cent increase for the year.  CPI is at the upper band of the Government’s target, excluding volatile items.  You would expect in a strong economy that you would see some price pressures but it is important that we are vigilant in relation to inflation, that we keep inflation low. That has been a big part of the economic success story of Australia and keeping it low will continue that economic success story into the future.

JOURNALIST:

When do you see banana prices easing?

TREASURER:

Well I hoped the effects of Cyclone Larry would have moved through the system altogether for this quarter. We still had an effect in this particular quarter with the price averaging $13 a kilogram, that is about the price that you are seeing in the shops now, so the prices are not still rising but they are not yet falling.  So they shouldn’t add and they shouldn’t detract if they stay at around these levels to the current quarter, to the December quarter.

JOURNALIST:

Does this give the Reserve Bank ammunition to raise interest rates before Christmas?

TREASURER:

This is a CPI which is at the upper band, excluding those volatile items and the volatile items will not add, quite possibly detract in future quarters.  So, it is a CPI which is towards the upper band of our targets.

JOURNALIST:

Treasurer, figures released by the RBA show that underlying inflation looks like pipping 3 per cent, hasn’t this sufficient pre-condition for a rate rise by the RBA been met?

TREASURER:

Well the RBA figures are around about the upper band, around about 3 per cent as I said earlier, and they confirm our own figures excluding volatile items from the CPI.  The important thing with inflation though is you have got to try and look at where it is going, where do you think inflation will be in 12 months time.  A lot of these volatile items will be outside of the index and you have got to try and get a picture of what is happening in the general economy.  And in the general economy my impression is that we are towards the upper band of our target. 

JOURNALIST:

Are you concerned about what the impacts of a rate rise would be on the bush?

TREASURER:

I think at a time where Australia’s farmers are in such severe drought, they will be looking for good news wherever they can find it and the best news they could have is rain, the second best news they could have would be drought relief which the Federal Government has put in place and the third best news that they could possibly have would be good economic conditions.

JOURNALIST:

What pressures will be placed on ordinary households if the Reserve does opt for an interest rate increase given that inflation is at this upper band?

TREASURER:

Well I am not going to talk about future movements of monetary policy. But I think for households the important thing is that we keep prices steady.  It doesn’t help households if prices are increasing, that is more money they have got to find.  So you have got to try and keep steady and low price increases.  We define that as 2 to 3 per cent.  I think you will see that over forthcoming months because the best news for households will be the fact that petrol has come down.  This is quite significant.  Now, I am not going to make any grand predictions as to what will happen over the next 6 to 12 months but the good news is that the petrol price which has averaged in the capital cities $1.30 plus for six months is now at $1.14.  And that is good news for household budgets.

JOURNALIST:

(inaudible) the Reserve Bank to put up interest rates next month?

TREASURER:

I never comment on future movements in monetary policy.

JOURNALIST:

How confident can you be that inflation won’t continue to rise?

TREASURER:

Well, you are actually seeing some of the factors that have increased inflation start to reverse.  One of the factors I think that has had an impact on the general economy was the petrol price, the fuel price, which back in August was at all-time records.  Now in October that oil price has fallen over 20 per cent and every small business that transports goods that was paying $1.30 a litre, today is paying about $1.14 a litre.  Now, if the petrol price went up again suddenly in November that would be reversed.  But if the petrol price stays where it is, that is a very positive sign because it means that fuel prices compared to September or June will start detracting rather than adding as they were in September and June. 

JOURNALIST:

Do you see the fuel price going down lower than $1.14?

TREASURER:

Look, I am pleased it is down at $1.14, I don’t want to tempt fate. I would be very pleased if it stayed there thank you very much, but if it could go lower that would be great too.

JOURNALIST:

Another issue…

TREASURER:

Last question.

JOURNALIST:

…the war in Iraq, you were quoted on radio this morning suggesting that it wasn’t a good idea to involve Syria and Iran in trying to stabilise the country, why is that?

TREASURER:

What I said is I don’t think Iran and Syria are helping to stabilise the situation in Iraq.  If Iran and Syria wanted to help stabilise the situation in Iraq, in my view they could do much more to clamp down on terrorist groups, on arms that are coming into that country and they would clamp down on some of their client organisations which are responsible for other attacks such as Hezbollah.  So, unfortunately I don’t believe that Iran and Syria are forces for peace and stability in the Middle East.  I wish it were different, I wish that they were forces for peace and stability in the Middle East but under the current leadership in both countries they are not demonstrating that.  And whilst they are not demonstrating that, that is not of assistance to Iraq or indeed to other states, peaceable states in the Middle East. 

JOURNALIST:

How well do you think the Prime Minster is handling the situation with the Pacific?

TREASURER:

Look, the answer is very well.  I was in the Solomons myself in July. There is no doubt the Solomon Island people appreciate everything that Australia is doing for them.  The people understand that law and order and peace on the streets has come in as a result of the RAMSI mission.  Now, whatever the government of the Solomon Islands says, the people of the Solomon Islands know that Australia’s police, Australia’s troops, Australia’s aid is giving them a better life and always maintain your focus on what the people of the country want when these issues arise.  Thank you.