Transcript No. 2000/88

We’re joined now by the Federal Treasurer, Peter Costello. Good morning Mr

Costello.

Good morning Paul. How are you?

Very well thanks Treasurer.

Good.

Treasurer, how can you argue that this latest Reserve Bank rise has nothing to do with

the GST? Surely the Reserve Bank would be remiss if it didn’t have an eye towards the

inflationary effects of the New Tax System.

Well, the fact is, it doesn’t. And how you can say that, is by what the Reserve

Bank said. The Reserve Bank publishes the reasons why it moves interest rates, and as it

made clear it’s not basing its decisions on any price effects from the tax changes.

It said that quite clearly. And this has been a statement that it’s made on numbers

of occasions. And of course what it was looking at, was the economy over the last couple

of months before Goods and Services Tax started on 1 July. And what it was saying, was

that the economy has grown stronger than was expected, that the world market is picking up

and particularly with the price effects that that brings, that it had an eye to all of

those things in making it’s decision.

So Mr Costello are you saying that the Reserve Bank only looks back when it’s

looking at interest rates, it never looks forward?

No. What I’m saying is that the best indication as to why it makes its decision is

what it says, and as it made clear in its decision yesterday it’s not taking into

account price changes as a result of tax changes, as they’re one-off. What it looks

at, is it looks at the underlying situation in the economy, the ongoing measures from past

experience, and as are expected in the future.

So that would be GST effected then? I mean, the Governor Ian McFarlane said he was

concerned about wages that were likely to increase in the post GST environment…..

No. He was talking…

…so he was talking about (inaudible)

….the Bank doesn’t look at the one-off tax effect on prices, can see that quite

clearly. It extracts those. You’re going to have a one-off effect on prices because

of tax changes. It doesn’t tell you about underlying inflation, this makes it quite

clear that what it’s interested in is the ongoing inflation, you abstract the one-off

structural change, you look at the ongoing inflation, and looking at that there was

pressure in relation in producer prices and we have a stronger economy. Now you can look

at all of that data. But the one thing that the Bank has been clear about all along, is

that you take out the one-off change to prices from the tax changes.

Now I know you are pushed for time Treasurer, just one last question. The Queensland

Master Builders are already talking about 15,000 building industry jobs going as a result

of this interest rate rise. Are you concerned about these effects?

Well look, I think a lot of these figures are speculation. What we know about the

economy is this, that there has been a real build up in housing approvals and housing

business and part of that was people bringing contracts before 1 July and so you’d

expect that to edge off, and part of it was the natural cycle in any event. But the

important thing really in interest rate policy, and bear in mind this, that by historical

standards home loan interest rates are still low. In fact the average home mortgage,

person on the average home mortgage is now saving $200 a month on where interest rates

were before the Government was elected. But the important thing to make sure, is that our

wages are moderate, there’s no grounds at all for people to be seeking wage claims

more than four per cent, that our economy is competitive, that we keep the competitive

pressures out there, and that we continue good economic policy because that will be

consistent with keeping interest rates low.

Ok. Peter Costello thanks for your time this morning.