Consumer Price Index, Dollar, Interest Rates, Australia-China Free Trade Agreement – Press Conference, Melbourne

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Consumer Price Index, Dollar, Interest Rates, Australia-China Free Trade Agreement – Press Conference, Melbourne


Press Conference

Wednesday, 22 October 2003
12.05 pm

SUBJECTS: Consumer Price Index; Dollar; Interest Rates; Australia-China

Free Trade Agreement


Today’s Consumer Price Index showed an increase in prices of 0.6 per

cent in the September quarter and 2.6 per cent over the year, confirming

that Australia’s inflation rate remains low and within the band of 2

to 3 per cent which has been fixed by the Government by agreement with

the Reserve Bank of Australia.

Those factors which contributed to higher prices in the September quarter,

included petrol prices as a result of higher world crude oil, housing

costs because of strong and ongoing activity in the construction sector.

Now those items that actually decreased in prices in the September quarter

included vegetables, audio visual and computing equipment, pharmaceuticals

and holiday travel and accommodation.

Overall, however, an outcome of 0.6 per cent for the quarter and 2.6

per cent for the year is an outcome which shows that low inflation continues

in Australia. There are no signs of price pressures, and in fact we believe

that consumer prices will decline over the course of this financial year.

Australia is now in the situation where our unemployment rate is below

6 per cent and our inflation rate is below 3 per cent. The last time

we were in territory like this was in 1968, thirty five years ago. So

it is confirming an economy with good jobs growth, without price pressures

and an inflation rate which is very much within the band that the Government

has set and indeed, looking through the course of the year, if anything,

we would expect price pressures to moderate and perhaps even come off

a little.


Why do you say that so confidently that price pressures are not going

to (inaudible) prices are (inaudible) falling?


Well, we forecast, in fact, a lower CPI through the year to 30 June next

year. We don’t see any price pressures in the domestic economy. In this

particular quarter, as you would know, there has been an appreciation

in relation to the exchange rate so that will have an effect on some

of the prices of imports. But if we can keep wage pressures moderate,

if we can keep our economy growing solidly, which I believe it is, then

inflation will remain moderate and I don’t see it accelerating from this

point at all.


Do you see the higher dollar playing a role in prices coming down?


Well, the exchange rate, obviously, is going to reduce the prices of

imported items and that will help to keep inflation low. I think most

Australians would think that as the Australian dollar appreciates, that

they would see that as a good thing, and it is a good thing in the sense

that it brings imported prices down. Overall, however, the fact that

the Australian dollar has appreciated so much makes it harder for our

exporters. And overall, because it makes it harder for our exporters,

that is probably a negative effect on economic growth. It is counter-intuitive

for many Australians, who, I think look at a strong exchange rate and

say that is a good thing. And it is a good thing if you are buying imported

items or if you want to have an overseas holiday. But overall, it makes

things more difficult for our exporters. And overall, that detracts from

growth. So, the stronger exchange rate overall will be detracting from

growth and it will make it just that little bit harder for Australian



Will it make it also a more difficult balancing act for the Reserve Bank?


Well, overall a stronger exchange rate would detract from growth. Now,

Australian growth will still be solid. It will be, we are forecasting

above 3 per cent, by world terms, one of the strongest performers. I

am, how you draw that into your equation on monetary policy is a matter

for you.


How concerned are you though, about the dollar appreciating?


Well, look, I said at the time, when the Australian dollar against the

US dollar was below 50 cents, I said that that was not a fundamental

of the Australian dollar. I said it was caused by the rise and the rise

of the US dollar. And I made the point over and over and over again that

the US dollar would correct itself. If you go back to that period, all

sorts of experts had all sorts of theories. But that period was the rise

of the US dollar. And we had all that talk about new economy, old economy

and all that. I remember making the point at the time that it would correct.

And it has corrected. But, the Australian dollar has risen against the

US dollar this year by 25 per cent. That is an extraordinary rise. Now,

a large part of that of course is the correction in the US dollar, as

we always expected. But that rise of 25 per cent has made things tougher

for our exporters. We should acknowledge that and because it has made

things tougher for our exporters, overall that will detract from growth.

Our exporters – again it is counter-intuitive – our exporters were enormously

helped when the Australian dollar was low. A lot of people, you know,

would have said, what a terrible thing. Well it wasn’t a terrible thing

for our exporters. I will tell you that. And life has become more difficult

for Australia’s exporters and that will have an effect on our current

account balance.


Is it possible to quantify the effect on growth of, the dollar is now

above 70 cents US, is it possible to quantify the effect on growth?


No, I am not going to quantify it. I make this point, and I have just

made it, that as the dollar rises our exporters find it tougher. As exporters

find it tougher, your trade balance is greater. That detracts from growth.

Our growth would be much higher than it currently is, if we didn’t have

that imbalance. And to some degree, that imbalance has been worsened

by exchange rates. Now, I am not going to put a figure on it. I will

be doing Mid Year Reviews in November, and that is the point at which

I will update our forecast. But we are forecasting growth in the Australian

economy above 3 per cent, that is a decent clip by world standards.


So do you see the dollar staying at around those levels (inaudible) or

do you think it is just part of general cycle (inaudible)?


I am not going to forecast future movements in the dollar.


(inaudible) this morning supported by reports of a free trade pact with

China (inaudible)?


I am not going to go into reasons behind currency movements but I will

say this, that a trade and economic framework agreement with China would

be very positive for Australia and the degree to which we can heighten

our trading links represents a wonderful opportunity for our economic

future. China is going to be the growth economy of the world and it is

in our region. And more importantly, we have a lot of what China wants

to import, particularly in the energy and minerals area. Now, developing

that relationship with China will be an enormous benefit to Australia.

And as China comes out of the regulated command economy, and becomes

more and more a liberalised economy, it is going to grow better. And

that will be a long term benefit for Australia, and it is in our part

of the world and we have a natural complement with what they need in

terms of their own trade.


If there’s no general threat to inflation, does it make an interest rate

rise more desirable to (inaudible)?


Well look, we have inflation targets. We have set an inflation target

by agreement between me and the Governor of the Reserve Bank. That is

at 2 to 3 per cent over the course of the cycle. Where are we today –

2.6 per cent. Bang in the middle, bang in the middle. And we don’t see

price pressures emerging in the near future. So, you would have to say

that in terms of the inflation targets that we have got, today’s outcome

is very much on track.


But does it make an interest rate rise more desirable?


Well, I am not going to talk about future movements in interest rates.


(inaudible) house prices are not part of the CPI is that right?


Housing construction is. The construction cost of housing is part of

it, but that’s the way in which it gets in, which actually rose. But

these CPI, Consumer Price Index, don’t measure the housing market in

terms of established real estate and land.


(inaudible) read today that an interest rate rise could be as soon as

Melbourne Cup Day?


What paper did they read that in? The Age? Enough said. Thank you very