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Interest rates, Economy, Petrol excise


Transcript No. 2000/07


The Hon Peter Costello MP




12.00 noon

Wednesday 2 February 2000

SUBJECT: Interest rates, Economy, Petrol excise


Well, as you know this morning the Reserve Bank announced its intention to intervene in

the market and to lift official interest rates by 50 points to 5.5 per cent. Obviously

what was on the minds of the Bank when it made its decision to that affect was

particularly developments in the international economy. And you have seen as the world

economy begins to gather pace and people become more optimistic about world economic

developments, the central banks around the world have started moving as the Reserve Bank

notes in its statement, and the US Federal Reserve has tightened policy by 75 basis points

in the last six months. The Bank of England has tightened policy by 75 points in the last

six months, New Zealand’s tightened by 75 points in the last three months. And there

are many people that expect the US Federal Reserve to again tighten policy overnight, and

I guess we’ll know about that by tomorrow.

Let me say, that the strengthening world economy is in the short, medium and long term

a good thing for Australia because what it means is that as the world economy strengthens

there will be greater demand for our exports, that will be good for economic growth in

Australia and that will contribute to jobs growth. And the task in Australia at the moment

is to ensure that the growing economy, and the economy’s been growing at about 4 per

cent for the last four years, is maintained. If we could maintain growth in Australia at 4

per cent, that would be great for job seekers, it would mean that we could continue

employment growth at 2 per cent or more, and it would mean that we would make even larger

inroads into the unemployment rate and provide more jobs for people who want to work. The

Reserve Bank also notes in its statement, I think this is a very important warning, that

it’s important that wage demands are restrained. The Bank notes in its release that

there are developments on the wages front which, and these are my words, if they were to

continue could have effects on inflation and that is one of the reasons why the Government

calls on people, particularly in the building industry – both employers and employees, to

exercise restraint. The task for economic policy at the moment is to continue the growth

in the Australian economy. 4 per cent growth over the last four years has led, since the

Government was elected, to over 624,000 new jobs. And if you’ve got continuing 4 per

cent growth over the next four years and continuing employment growth, you would make huge

inroads into unemployment. And that is the task of economic policy to keep a strong rate

going which will provide more jobs for the Australian public.


Treasurer, last week the Prime Minister said there was no need for a rate rise. Does

this show that Treasury and Cabinet are out of step with what the Reserve Bank is thinking

on monetary policy?




Yes, the Reserve Bank saying, that there is a need for a rate rise and the Prime

Minister last week saying, there is no . . .


Well, I don’t think Treasury said anything. The Prime Minister last week made the

comment that the Australian economy was not overheating, and that’s also a comment I

made, and I think the Reserve Bank made it in its statement today. I think the Reserve

Bank completely agrees with that. In fact, as I recall in its statement, “the

tightening like its predecessor in November can be viewed as pre-emptive in that it has

occurred before overheating has emerged”, so the Reserve Bank also takes that view.

The comments that I made last week were, that obviously what had changed in economic

understanding was that the world economy was stronger and I think you’re seeing a lot

of that reflected in this particular statement. The Reserve Bank is an independent bank

and it makes its own decisions. I think it’s no surprise that it tightened interest

rates today. If there was any surprise it was whether it was going to be 25 or 50 basis

points. As I say, in the climate where the US central bank tightened by more, the Bank of

England tightened by more, the New Zealand Bank had tightened by more, that was obviously

something that was very influential in its thinking. But it’s issued a statement as

to what its reasons are, largely referring to the international economy, they speak for

itself. From the Government’s point of view, the Prime Minister’s point of view,

my point of view, it confirms our assessment that the economy’s not overheating, that

you haven’t seen signs of overheating, but the Bank took the view that this could be,

as it says, a pre-emptive step which would continue the economic growth that we’ve

seen in the past.


Were you surprised that it was 50 basis points as opposed to 25?


There was a lot of argument as to whether it would be 25 or 50, and there were

arguments both ways and I followed the debate pretty closely.


Do you agree now that there is going to be inevitable wage pressure?


Well, I call on both employers and employees to exercise restraint. There are obviously

large claims out there at the moment, particularly in the building industry and

particularly in Victoria. Now I make this point, that if unions are successful in some of

those large claims then that will naturally have an effect on inflation and that will

naturally have an effect on interest rates. One of the things that we’ve been able to

do, one of the reasons why we’ve been able to run a low interest rate policy in

Australia is because we’ve had a low inflation rate and because we’ve had

moderate wage claims. Now, wage claims are now increasing. If employers give into those

wage claims and if the claims continue to be made, that would not be a good development.

It calls for restraint on both sides.


Don’t you think there’s some justification now, given two rate rises within

three or four months of each other?


Well, the CPI, the Consumer Price Index, is below 2 per cent. So, if you wanted to

maintain the value of wages, you would be looking at a 2 per cent rise. If you wanted a

real wage rise based on a productivity improvement, you might be looking at 3 or 4. But

I’ve seen claims that are of the order of 24. Now a wage claim of 3 or 4 per cent is

consistent with a low inflation outcome, but a wage claim beyond that is not. And if

employers were to accede to those claims, and if unions were to make them, that would not

be a good development for the economy.


Mr Costello, regional Australia’s come in, the Government’s come in for a lot

of flack from regional Australia recently. Your backbencher, David Hawker, says this

interest rate will do nothing to help regional Australia. Your reaction?


Well, as I said, I’m the Treasurer and I speak on behalf of the Government. And

the Government’s view is that it is important that we continue the momentum of

economic growth, that’s the best thing you can do for the nation as a whole. We

actually support a low interest rate policy and although rates have increased by 50 points

today, your mortgage interest rate, as I would expect, will probably move into the sevens,

is still lower than the average mortgage interest rates of the nineties, the eighties and

the seventies. So, we are still comparatively low and if the wage pressures are kept under

control then we can continue to run good inflation and good interest rate outcomes.


Is 50 basis points too much though?


Look, there was a lot of argument, I think, between those that were in the 25 school

and those that were in the 50 school and I think the Bank, for the reasons that it’s

put out in its statement speak for themselves, wanted to make sure that it was taking a

pre-emptive move.


What’s your view, do you think it was . . .


Well, I don’t, I don’t offer a second commentary mirroring the Bank for

obvious reasons.


Do you see this as it being a decision as a hedge against what’s happening



Well, the point that’s made in this statement, and the statement speaks for

itself, is, that in most countries central banks are increasing rates. The US has

increased rates by 75 points in the last 6 months, many people believe it’s going to

increase rates again tonight. Now, I’m not making my own forecast but many people

believe it’s going to increase rates again tonight. The Bank of England has increased

rates by 75, and the Reserve Bank of New Zealand has increased rates by 75, so why are

those banks doing it? Well, they’re doing it because the international economy is now

stronger than people believed. I think I was at the IMF annual meetings back in September

and there were then tentative views that perhaps the worst of the Asian financial crisis

was over. I was at the G20 meeting of the 20 Finance Ministers, central bank governors in

Berlin in December, and there was a lot more optimism. And I think if we, at the next

meeting we’ll have would be at the IMF in April, and I think every country in the

world, probably would have revised up its growth forecasts by then. But what’s

happened is that the world has come through the biggest financial collapse of our time

– Asia. There is now optimism that not only has Asia bottomed and recovered, but the

world economy is stronger. And in particular, that is led by the US which had an

exceptionally strong growth figure on Friday and its central bank, well, is meeting as we



Treasurer, the Reserve Bank said in its statement that the 50 basis point rise was

meant partially to signal to the market that policy is now neutral. Should home owners be

relieved that we’re not going to get more rate hikes if policy is neutral?


Well, it used the interesting expression, didn’t it, that policy’s been moved

to a neutral stance. And I think what it was trying to say there was, that whereas you

would expect an accommodating policy during the period of the Asian financial crisis, with

the world now not being in a crisis state as it was during much of ‘97 and 1998, that

they want to get back to neutral. That’s what they say, their terminology.


Treasurer, Kim Beazley is blaming the rate increase on what he says is the inflationary

pressures posed by the GST. What do you say about his assessment?


Well, it’s silly and desperate, isn’t it? Here we are, the Reserve Bank

publishes the reasons for its rises. We’ve got tightening monetary policy in the US,

and the Bank of England, New Zealand which is obviously influential, Mr Beazley says, that

it’s the result of tax changes which haven’t taken effect. Presumably, Mr

Beazley will be arguing that the US Federal Reserve is tightening US interest rates

because of the Australian GST. And the Governor of the Bank of England, Eddie George, is

sitting down tightening English interest rates because of the Australian GST. I fully

expect if there’s an earthquake next week Mr Beazley will probably claim that’s

a result of the GST. These are silly and desperate comments, but I guess if you don’t

have policy you get into that kind of parrot-like response. But you might ask Mr Beazley,

why the US is tightening rates in the light of the Australian GST? It might actually be a

good question if you could get some Labor Press Sec to turn up in Washington and ask why

Dr Alan Greenspan is moving US interest rates on the back of the Australian GST.


Why has the Government increased petrol taxes?


The Government hasn’t increased petrol taxes. What happens is that the excise

arrangements are indexed by arrangement that were put in place by the Labor Party in 1983,

and as a result excise is moved in line with the Consumer Price Index. And that’s the

situation that has applied for 18 years, for 18 years in Australia. And can I say, during

the period of the Labor administration which put it in place in 1983, the CPI was

increasing on average 5 per cent a year, and that was feeding into the excise. It’s

only in the last four years when the CPI has been 1 per cent, that the motorists have got

a much better deal out of that arrangement. The last four years have given a much better

deal than the previous 14.


When the GST comes in will the prices go up again for fuel?


What we’re doing in relation to GST is we’re reducing excise, we’re then

applying GST, and the consequence of that is, and I noticed in all of the press commentary

and the commentary made by some of the motorists organisations today, they didn’t say

this, that for business because they get all GST back, petrol becomes 10 per cent cheaper,

and for transport costs for trucks, the petrol excise, which is currently about 43 cents a

litre falls to 20. So in relation to rural transport costs, the excise halves. This is the

first time there have ever been reductions that will apply in relation to business use of

petrol and heavy truck excise from 1 July. Now, you know, people are entitled to always

look on the bad side, but I would’ve thought that those points could have been made

in the discussion.


Treasurer, can I have a comment on Cheryl Kernot’s reappearance this morning?


What particular aspect?


Just that she’s reappeared.


Oh well, look, I wish her well. I hope that she can return to her duties. We’re

looking forward to seeing her back in Canberra. I don’t wish anyone illness or bad

health. And if she’s over her illness and her bad health I, you know, hope she can

return to duties and I hope the Labor Party gives her the support that she deserves.




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