Doorstop Interview

Department of the Treasury

Langton Crescent, Parkes

Wednesday, 3 May 2006

12 noon

SUBJECTS: Interest Rates, Budget, welfare, Queensland health funding

TREASURER:

The Reserve Bank this morning announced that it will move in the market to adjust official interest rates to 5¾ per cent, citing principally international factors including recent upgrades to international growth forecasts. It is true that the world economy is in a strong position at the moment although I don’t believe that there has been any major revision in relation to that. One of the effects of the strong global economy is the increase in commodity prices.

For most Australians that is an increase in oil prices but in addition to that of course it is an increase in coal and gas and iron ore and a whole lot of things that Australia sells. So that has been contributing to national income. For borrowers what that means is that the standard variable interest rate is more likely to be around 7½ percent, although as the bank notes, many Australians in fact have lower rates than that because they are able to negotiate better. But 7½ per cent, that will mean that people will be paying more in relation to their mortgage and that will have a dampening effect in relation to the economy.

Under this Government mortgage interest rates have been as low as 6 per cent and as high as 10 ½ per cent when we were elected, 7½ per cent is round about mid point between those two areas. Mortgage interest rates under the previous Government averaged 12¾ per cent, so when you look at historical perspectives 7½ percent is lower than we had by historical precedent but of course for borrowers it will represent increased payments on their mortgages unless they decide to extend their terms.

JOURNALIST:

Was the RBA aware of what was in the Budget before it made its deliberations?

TREASURER:

This is not related to the Budget. The Australian Government is now debt-free. The Australian Government finances are in the strongest position they have been in since the early 70s, for over thirty years. The Australian Government, by building surpluses and paying off debt, has been contributing to downward pressure on interest rates. This is a decision which as the bank says in its statement is principally motivated by the strong global economy which is in a strong position as a result principally of the emergence of China and India and other emerging powers.

JOURNALIST:

This move today will it be enough do you think to ease the inflationary pressures that the Reserve Bank is concerned about?

TREASURER:

Well, inflation is still within the band actually and when you take petrol out it is still substantially within the band so this is not really something that’s being motivated by current inflationary pressures. You try to look down the track here and say in a strong global environment, what you think will happen; now this is one of those line ball calls. There is a lot of respectable opinion each way on this decision and it was a line ball call which was taken by the independent bank. We note its decisions and we note its reasons, but we will be producing our own inflation forecast in the Budget next Tuesday.

JOURNALIST:

How will that affect consumers, the decision to raise interest rates?

TREASURER:

Well it will have a dampening effect on consumption, there is no doubt about that. It is intended to have a dampening effect on consumption, that is why the bank does these things. It looks at the international economy, it sees an economy which is strong, that economy is bringing a lot of money into this country principally through commodities and the bank has decided to have a dampening effect on consumption.

JOURNALIST:

(Inaudible) election promises .

TREASURER:

Of course not.

JOURNALIST:

Treasurer, won’t further tax cuts in the Budget have a stimulatory effect and increase the likelihood of further interest rate rises?

TREASURER:

Well the Government will bring down a responsible Budget as we have over the last ten years and that responsible Budget will be consistent with keeping the economy growing, keeping businesses profitable, keeping people in work, helping families and ensuring that we set Australia up for the future.

JOURNALIST:

Will tax cuts have that effect?

TREASURER:

Well I am not going to speculate on what is in the Budget. Funny place to announce that here.

JOURNALIST:

Can the Howard Government still be trusted to keep interest rates low?

TREASURER:

Well the standard variable mortgage interest rate is around 7½ per cent, under this Government when it was elected it was 10½, that was a legacy of Labor and it has been as low as 6, so at 7½ it is still, what, about the average. The average standard variable mortgage interest rate under the previous Government, the average, was 12¾ per cent and if you were paying the average Labor Party interest rate today on your mortgage you would be paying $215 a week more, so this rate compared to the Labor Party average is $215 a week lower, that is a lot on a mortgage.

JOURNALIST:

Treasurer, are you worried about the level of inflation at the moment?

TREASURER:

Well not even the bank says that inflation is outside the band, the band is 2-3 per cent

JOURNALIST:

(Inaudible) end of it though

TREASURER:

Well, not even the bank says that inflation is outside the band. The band is 2 to 3 per cent over the course of the cycle and what did we find in this announcement today? We are probably at a peak of the cycle. Actually it would be quite consistent with our inflation targeting at the peak of the cycle to be outside the band, that would be quite consistent, just as you would expect at the trough of the cycle you might be below the bottom limit. So, when you actually read the statement carefully, there is not a suggestion that we are outside the band, the principle reason, and I think that the word that the Bank uses the significant reason, is the international economy is strong. Now, what does that mean for Australia, the international strong economy? It means that commodity prices are high which means oil is high and that is a downside for households. But because international commodity prices are high it means gas is high and coal is high and iron ore is high and these are things that Australia sells and in selling those a lot of income is coming into the country. How does it come into the country you are going to ask me? It comes in because you are seeing record profits by mining companies, absolute record profits, the like of which we haven’t seen. And so you have got extremely profitable corporate Australia with a lot of income coming into the country and the Bank has taken that as a sign to tap consumption.

JOURNALIST:

Treasurer, were you surprised by the decision?

TREASURER:

Oh I hold my own counsel on these things.

JOURNALIST:

Treasurer, are you concerned about credit rate growth? That is the one thing the Reserve mentioned.

TREASURER:

I am not actually, credit rate growth is much slower today than it was 2 or 3 years ago, and not even the Bank says that it is back where it was 2 or 3 years ago. So, I don’t think there is a worry about credit growth here at all frankly.

JOURNALIST:

Access to credit though?

TREASURER:

Well, I have said previously that I don’t want financial institutions to downgrade credit standards. And I had a meeting with the Chief Executives of the four major banks last week and I re-emphasised that point to them. In an economy which is near full employment with record company profits, with share market at all time records it is very easy to push money on to consumers and I don’t want the Australian banks to lessen their credit standards. It is a point that I made to them when I met them, the Chief Executives of the banks last week, the four major commercial banks.

JOURNALIST:

Treasurer, did you say a minute ago that it is your view from the statement that we are probably at the peak of the monetary policy cycle?

TREASURER:

No, I said the peak of the economic cycle. I was talking about the economic cycle. We are in a commodities boom, a global commodities boom and you are seeing that in prices. Now, how long will that last? Well it won’t last forever, you have heard me on that subject but we are at the peak of an economic cycle here. It is possible that the globe might strengthen a little bit or come off a little bit but in global terms we are at a peak that the world hasn’t seen for a long time and in Australian terms we are in a terms of trade boom which we haven’t seen for 30 years and that is a consequence of being at a peak of an international economic cycle.

JOURNALIST:

(Inaudible) it will turn down then, in coming?

TREASURER:

It will, it will. The world economic, well let me put it, for Australia it will turn down. It will turn down because prices are so high at the moment when we get extra capacity, when Brazil gets extra capacity, when Indonesia gets extra capacity prices will come back.

JOURNALIST:

Treasurer, Mal Brough’s proposal to strip dead-beat Dads and Mums of welfare

TREASURER:

Take one here and then one over there.

JOURNALIST:

of welfare if they are

TREASURER:

Because I admire The Australian so much.

JOURNALIST:

and we admire you Sir, and if they are not sending their kids to school, do you support that proposal, do you think it should be compulsory or are you worried it could create a bit of a nanny state?

TREASURER:

I think that family payments in Indigenous communities should be dependent on school attendance, absolutely. I did a tour with Noel Pearson last year, we went through some of the Cape York communities, he advocates it, I wrote a piece for Mitchell Fifield’s Bulletin advocating it, we are going to trial it and there are some people that say, well how can you do this in the Indigenous communities and not in the white communities to which my answer is, if it works in the Indigenous communities, we ought to do it in the white communities. Rather than do it in neither, if we have got to be even-handed, let’s do it in both but before we go too far, we will have a trial. Always useful to trial things.

JOURNALIST:

Mr Costello

TREASURER:

No, hang on, hang on, I have promised The Australian the next question.

JOURNALIST:

Treasurer, have you had to re-work any of the Budget numbers as a result of the Reserve Bank’s decision?

TREASURER:

Look, we take into account economic growth and we wouldn’t be changing forecasts, our economic growth forecasts, no we wouldn’t be changing our economic forecasts in relation to this.

JOURNALIST:

Treasurer, on Queensland (inaudible) do you think that the Queensland Government is spending its health budget

TREASURER:

Sorry, you will have to speak up, this wind is blowing in my ear.

JOURNALIST:

Queensland health, do you think that Peter Beattie and his government are spending their money (inaudible)?

TREASURER:

Well the point I have made is that between GST and healthcare grants, the Commonwealth gives about $9 or $10 billion per annum to Queensland and one of the principal things that that is supposed to fund is the health system. Now, I think people want to know that for say, $10 billion per annum, they are getting good health standards and I think we ought to have performance standards in relation to healthcare, we ought to have outcomes that are transparent and we ought to make sure that the taxpayer is getting the best money they possible can get producing the best outcomes that they can possibly get in health spending.

JOURNALIST:

Mr Costello, could you beat Mr Beazley in an election?

TREASURER:

Oh, I think I will let that ball go through to the keeper, Dennis.

JOURNALIST:

Mr Costello

TREASURER:

(inaudible) Samantha Maiden.

JOURNALIST:

If we are at the upper end of the economic cycle, do you think the Reserve has been too conservative?

TREASURER:

I wish you all a very good day. Thank you very much.