Press Conference

70 Phillip Street, Sydney
Wednesday, 21 August 2006

12.15 pm

SUBJECTS: Interest rates

TREASURER:

As you know the Reserve Bank this morning announced its decision of yesterday to increase the official cash rate by one quarter of one per cent to 6 per cent. The factors that it cited as governing its decision were a strong global economy, increased domestic demand – particularly led by very strong investment.

The picture that it gives is of an economy which is strong being led by investment on very low unemployment and, as a consequence of that, where inflation is rising slightly in an underlying sense. As expected, the Bank looked through the effect of bananas and fruit, as it should, and of course the direct effect of petrol prices.

But it is important that we remain vigilant to ensure that petrol prices do not have second-round effects. If petrol prices were to be used as a reason for general price increases in goods and services, or if wage claims, unsupportable wage claims, were to be successful and they were to be built into the effects of goods and services that would be bad for the Australian economy.

The important thing is to make sure that our wage outcomes are consistent with productivity, to ensure that we keep the economy as competitive as possible so that it is difficult for producers to get general increases in goods and services and to maintain the continuing growth of the economy on a sustainable basis which will keep unemployment low.

JOURNALIST:

Treasurer, the Government campaigned on low interest rates at the last election. What do you say to families that feel betrayed today?

TREASURER:

Well the standard variable mortgage interest rate, you would expect, would move to 7.8 per cent compared to 10 per cent when the Government was elected and a peak under the Labor Party of 17 per cent. So, when you put that in context, interest rates are still – what – 3 per cent lower than when this Government was elected and 10 per cent lower than the peak under the Labor Party.

JOURNALIST:

But the message that people got was that interest rates would stay low. What do you say to anyone that feels betrayed today?

TREASURER:

By historical standards it is 7.8 per cent – that is 3 per cent lower than when the Government was elected and 10 per cent lower than the peak under the Labor Party.

JOURNALIST:

But at the last election you campaigned on interest rates staying low. So just wiping away (inaudible) at the last election?

TREASURER:

Well at 7.8 per cent it is 3 per cent lower than when the Government was elected and 10 per cent lower than the peak under the Labor Party. So, by comparison with the Labor Party, it is substantially lower than it was.

JOURNALIST:

Mr Costello you say that the measure, the (inaudible) of petrol doesn’t go through the second round effects you say that as if it isn’t already. Are you sure that it isn’t already? There are some that would argue strongly that we are already seeing second round effects from higher fuel prices.

TREASURER:

I think the, abstracting from the one-off figures, the fruit figures, and abstracting from the direct impact of petrol prices, you have got a CPI which is up around 3 per cent so you are not seeing any large movement in relation to consumer prices yet, abstracting from those direct effects. But if you were to see, abstracting from those direct effects, a CPI which was well above 3 or approaching 4 then you would be seeing second round effects.

JOURNALIST:

But Treasurer as underlying measures (inaudible) up around 0.9 in the latest quarter. If you annualise that you are seeing an underlying rate approach 4.

TREASURER:

We don’t annualise the CPI. The CPI was 2.6 per cent, on some estimates around about 2.9 per cent.

JOURNALIST:

But you can annualise the CPI. You can annualise any rate you like, including the Reserve Bank’s own…

TREASURER:

You can annualise anything you like, you can annualise a monthly figure, you can annualise a quarterly figure. The way we do it in Australia is we look at an annual figure if we are doing an annual figure.

JOURNALIST:

Treasurer you don’t believe that petrol prices played any part in today’s rise?

TREASURER:

Petrol prices have had an effect most definitely on the Consumer Price Index. There is no doubt about that. And petrol prices are hurting families’ pockets, there is no doubt about that. But the point I am making about petrol prices is that if petrol prices turn around and have a second round effect, a big second round effect, so that we are not just paying increased petrol prices but we are paying increased prices for goods and services because petrol prices are feeding increases into them as well, that would be a damaging second-round effect. And that is where we have got to be vigilant.

JOURNALIST:

That is already happening in transport isn’t it? I mean the airlines, the fuel surcharges aren’t they evidence of that?

TREASURER:

Well, (inaudible) will be no doubt having an effect on air tickets and I am talking about the general economy, I am talking about all of the goods and services of the general economy, and I am talking about being vigilant there. The price of air tickets is not as significant in relation to consumer prices as the price of food and the price of clothing and the price of footwear and the price of housing and all of those other things.

JOURNALIST:

Treasurer do you know what people are paying at the petrol pump today?

TREASURER:

At the petrol pump? Oh well it depends where you are. You can be paying as high as $1.50 or $1.55 in some regional areas, you can be paying a standard of $1.43. In some States it can be below $1.40. It is lower in Queensland of course where the State Government uses some of its GST revenue to reduce the price.

JOURNALIST:

And the last time you filled up a tank was when?

TREASURER:

The weekend before last.

JOURNALIST:

What did you pay?

TREASURER:

I got it at $1.35.

JOURNALIST:

Treasurer you are cutting income taxes…

TREASURER:

I always watch the cycle to try and get the low point in the cycle. It generally goes up in relation to the weekend and it falls thereafter.

JOURNALIST:

Treasurer you are cutting income taxes and raising Government spending at a time when inflation was hitting 4 per cent. Was that the right thing to be doing? Have you erred in economic policy?

TREASURER:

Oh most definitely not. The cutting of income tax is absolutely essential to make this a competitive economy. And what we did of course is we cut top rates, we lifted thresholds, we increased the low income tax offset and we gave people much more incentive to go out there and to increase their effort and to increase the labour force. And it is important actually that we do increase the number of people in the labour force. We now have historically low unemployment. We are at 4.9 per cent unemployment in this country – this is the lowest we have had in 30 years. Now what we need to do is we need to encourage more people to join the workforce because we have still got plenty of job opportunities going, we need to heighten their incentive, we need to have a competitive tax structure and we have probably got a more competitive tax structure than we have had for decades in this country.

JOURNALIST:

Hasn’t the Reserve Bank just taken back your tax cuts today?

TREASURER:

No. What the Reserve Bank has done today is it has adjusted interest rates in accordance with global conditions and demand. And people would be in a worse position today with that decision if they hadn’t have had income tax relief – a worse position today.

JOURNALIST:

But aren’t they in a worse position with interest rates going up and the promise of more to come? A lot of the financial markets have another one built in.

TREASURER:

Well people will find that this will affect their mortgages of course. And that will put pressure on the family budget. But what I say to those people is that I know that this will put pressure on the family budget. And the critical thing is to make sure that we don’t have interest rates rises of 300 per cent which would take us back to where the Labor Party low point was or 1,000 basis points which would take us back to the height where they were under the Labor Party. We have had 25 basis points, 0.25 per cent, which means we are now 3 per cent, 300 basis points lower than we were when the Government was first elected. Now that will put pressure on family budgets but it is important to make sure that all of our economic policy in relation to wages, in relation to Government Budget policy are now directed towards keeping interest rates low. Now let me make one critical area where the Government has to keep and maintain its effort. We have now repaid $96 billion of Labor debt. Can you imagine where we would be today if the Government still owed $96 billion, if the Government was still borrowing rather than saving? Last question.

JOURNALIST:

What is the point of having a strong economy if your average Australian is crippled by their mortgage?

TREASURER:

The point of having a strong economy is so that people can find jobs.

JOURNALIST:

But then they are crippled by their mortgage.

TREASURER:

Let me tell you, if we still had 11 or 12 per cent unemployment where Australians couldn’t find jobs there wouldn’t be any income. And the most important thing in having a strong economy is so that people can find work. That is why we run a strong economy so you can get a job. It is no consolation to say ‘I am unemployed’, it is not going to help you with the family bills. The most important thing is to stay in work if you want to be helped with the family bills. We now have 1.8 million more Australians in work than we had back in the mid 1990s. That is 1.8 million Australians who have an income to pay the bills. And it would be no consolation to say to them well we will run a weak economy and put you out of work so you have no income. That is the point of a strong economy. Thank you.