Interview with Chris Uhlmann

ABC AM Programme

Thursday, 25 October 2007

8.10 am

SUBJECTS: Inflation, interest rates

UHLMANN:

Peter Costello good morning.

TREASURER:

Good morning Chris.

UHLMANN:

Treasurer, why did you gloss over the rise in the underlying rate of inflation yesterday when you know that that is the figure the Reserve Bank is watching?

TREASURER:

Because for most people the important thing is whether they are facing price rises.And the news that we got yesterday was that for consumers inflation is at 1.9 per cent.In fact it is the lowest in eight years. A second point of course is that monetary policy is targeted at keeping consumer price inflation between 2 and 3 per cent.Consumer price inflation.And in fact, it has been between 2 and 3 per cent over the course of this Government.Now, there are other statistical measures which you can use to inform yourself about prices but what we are shooting for is to keep consumer price inflation between 2 and 3 per cent over the course of the cycle.

UHLMANN:

But you use those other statistical measures when they suit you Treasurer.In July last year when the headline rate of inflation hit 4 per cent, you chose to highlight the underlying rate.Why is that the right number one day and the wrong number the next?

TREASURER:

Well as I said yesterday, you use the other statistical measure to inform when you take out volatile items and the other statistical measures showed that inflation was towards the upper level of the band – around 3 per cent.

UHLMANN:

Forcing the Reserve Bank to move.

TREASURER:

Well I don’t think that is the right understanding of monetary policy.The monetary policy which I have set with the Reserve Bank Governor, is to keep consumer price inflation between 2 and 3 per cent over the course of the cycle.Now, there will be times when it goes below it.In fact consumer price inflation is below it now.There will be times when it goes above it.But the important thing is that over the course of a cycle, over the course of an economic cycle, that it averages at 2 to 3 per cent which is what it has done compared to the Labor Party average of 5.2 per cent when the Labor Party was in government.Where inflation was, on average, double what it is today.

UHLMANN:

If we look at what is happening now and the people who really watch these things closely, the futures market now has an 83 per cent chance of a rate rise on November 7.Now surely the people who hedge millions, in fact billions of dollars know what they are on about?

TREASURER:

(inaudible) they move their positions on a daily basis…

UHLMANN:

(inaudible) 57 per cent to 83 per cent yesterday.

TREASURER:

Yes, they are trading on a daily basis and they move their positions on a daily basis.They are taking positions and they are trying to make money out of it.That is for them.But I am managing a $1.1 trillion economy and my objective is to get as people in work and to keep inflation low and to make sure the Australian economy grows.Now let me make this point, Chris – I think this is a very important point – that we have inflation around 2 to 3 per cent on the lowest unemployment in 30 years.Now, we couldn’t have maintained anything like this inflation rate when we didn’t have the important economic reforms that have been put in place.And I make this point.If you turn your back on those economic reforms with an unemployment rate which is now at 30 year lows, you will get as you got in Australian economic history in the past a blow out in inflation.

UHLMANN:

The market will have already factored in a possible Rudd Labor Government nothing has happened, there has been no stampede for the life boats.

TREASURER:

Well let me make the point because I think every economist who thought about it and successive Reserve Bank Governors have made this point.If you reverse industrial relations reform in this country, you will set of wage inflation just as we had in the ‘70s and the ‘80s and the ‘90s when the last time the Labor Party tried to cope with inflation you recall they said we had to have a recession.That is what Paul Keating said.We had to have a recession, that was their only way of controlling inflation.Now industrial relations reform had given us the capacity to have much stronger employment and keep inflation between 2 and 3 per cent and if you turn your back on that Chris, you are turning your back on Australia’s future economic prospects.

UHLMANN:

Treasurer, could you survive an interest rate rise?Would that not be the final nail in the coffin of the Coalition?

TREASURER:

Well I make this point that home mortgage interest rates at 8.3 per cent are what, I think they were 10½ per cent when I became Treasurer, so they are 2 per cent lower and the unemployment rate has halved.Now to think you could halve the unemployment rate…

UHLMANN:

And more rate rises are on the way, Treasurer.

TREASURER:

…but sorry, to think you could halve…

UHLMANN:

And more rate rises are on the way.

TREASURER:

To think you could halve the unemployment rate and still have interest rates lower than when unemployment was double what it is shows you how far we have come in this (inaudible).

UHLMANN:

Treasurer, the major banks are also telling anyone who cares to listen that they will raise interest rates no matter what the Reserve does because the credit squeeze now in the United States.

TREASURER:

Well for those banks that borrow in the United States their cost of funds has gone up because the United States economy is in trouble.And this is going to take a lot of management by the way.They say because their costs of funds have gone up they are entitled to charge borrowers more.There may be a case for that in relation to some business loans where let’s say, the cost of funds has gone up 10 or 15 basis points.That is about 0.1 per cent or 0.2 per cent.But there is no basis whatsoever for any of those banks to change their standard variable mortgage interest rates.Those standard variable mortgage interest rates are principally funded out of their deposit book and their deposit rates have not risen and they have no grounds whatsoever to move those interest rates without any change (inaudible) the changes coming out of the financial markets in the United States.

UHLMANN:

We will leave it there, thank you.

TREASURER:

Thanks Chris.