Interest Rates; World Economy; Australian Dollar – Doorstop Interview – Senate Alcove Courtyard, Parliament House

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October 23, 2003
Interest Rates – Interview with Steve Liebmann, Today Show, Channel 9
November 5, 2003

Interest Rates; World Economy; Australian Dollar – Doorstop Interview – Senate Alcove Courtyard, Parliament House




Senate Alcove Courtyard

Parliament House

Wednesday, 5 November 2003
10 am

SUBJECTS: Interest Rates; World Economy; Australian Dollar


Well, as you know this morning the Reserve Bank increased official interest

rates by 25 basis points, 0.25 of 1 per cent. The Bank cites as the reason

for this a strengthening in the global economy and amelioration in relation

to the drought which should improve growth prospects. And as a consequence,

says that it believes monetary policy no longer needs to be as expansionary

as it has been in the past.

The fact that the world economy is recovering is positive for Australian

growth conditions and we welcome the fact that the US economy is moving out

of recession. It looks as if recovery is taking hold in Japan and that should

lead to a stronger growth prospect for Australia’s exports.

The mortgage, home mortgage interest rate, which if you factored in this

rise, would be at 6.8 per cent. It is still very low by historical standards.

In fact, if you measure it against the rate prevailing when this Government

came to office, it was 10½ per cent. The average mortgage holder would

be saving some $585 per month on the average loan compared to that rate. So

these are still low interest rates by historical standards and I have made

the point over and over again to people that are entering into mortgages,

you need to factor in the fact that mortgage interest rates are low by historical

standards, into the decisions that you make, because mortgages are taken out

over a long period of time.

So, notwithstanding today’s rise, the fact is that the mortgage interest

rate is still considerably lower than our historical experience and certainly

much lower than it was before this Government came to office in March of 1996.


The Aussie dollar has moved above 71 cents, is that a worry in terms of

the exports, given your comments about the global economy recovering?


Well, the fact that the Australian dollar is high by our recent experience

means that our exporters are finding things more difficult. Yes. You compare

it to when the Australian dollar was, in our recent experience, at 50 cents,

that was a super-competitive exchange rate. I said that at the time. That

helped our exporters. They are no longer getting the help with the Australian

dollar at 70 cents odd, but you do have to bear this in mind, that in order

to export at all, you do need countries that can afford to buy your exports.

And the fact that the global economy is recovering means that there are more

people in the United States and Japan and elsewhere that now buy Australian

exports. So, the fact that the world economy is picking up is a positive,

the fact that the Australian dollar is picking up is actually something that

will make life harder for our exporters.


Are you concerned that the Reserve Bank is raising rates at the same time

as it is predicting inflation is falling?


Well, the interesting thing about today’s statement is that the Bank

sees no risk from inflation and nor do we. Inflation is right within the band.

So, there is no strike against inflation in today’s announcement. Today’s

announcement is put squarely in the context of a strengthening global economy.


But it’s also about household borrowing. Are you concerned the Reserve

Bank is changing the rules about when it raises rates?


No, well, it is not really about that because the Bank actually notes that

it thinks household prices is a positive for growth. That is a point that

has been made over and over again, the so-called wealth effect. No, the Bank

seems to take the view that the world economy has turned the corner. Now I

certainly think that the US is out of recession, I wouldn’t call the

Japanese economy yet, but the fact is, if the world economy is recovering,

that is a positive.


Will this prick the housing bubble Mr Costello?


Look, these are historically low interest rates. And I have made that point

over and over again. The home mortgage interest rate when the Government came

to office was 10½ per cent, so at 6.8 per cent. You are still on a

very low mortgage interest rate. But I say to people, and I have said this

over and over and over again, if you are taking out a mortgage, it is a 25

year, it is a 30 year thing. And you can’t expect something that is

at 30 year lows not to move over the course of a long mortgage. And I say

to people, and I will say it again today, always factor in a buffer in your

borrowing decisions. Now the fact that interest rates are still low means

that people will continue to borrow, but factor in a buffer.


Treasurer is your outlook on the economy better now than it was in May?




Is your outlook for the 03-04 economy better now than it was in May?


Well look we will be updating our forecasts in the Mid-Year Review, probably

around the end of November. The world economy is stronger than it was in May

and the drought is breaking. It is not breaking uniformly though, we had hoped

in May that it would break uniformly, there are still some areas of Australia

that are still in drought. This is, sure agricultural production overall will

be up, but it’s not going to be up uniformly unfortunately. There are

still some areas that haven’t recovered from drought. So, I am not sure

that I think agricultural production is going to be stronger than I thought

it was going to be in May.


Mr Costello, notwithstanding the historically low level of interest rates,

do you expect this particular increase to take some of the heat out of the

housing market and would you welcome that as a good thing?


Well, the fact is, that these are still low rates, and people will still

borrow at rates which are historically low. Now, I would say to people who

are thinking of buying houses, sure it is a good time to buy a house when

interest rates are low, but you must remember this, that an, a home mortgage

lasts for 25 or 30 years. And you must bear in mind that over the course of

10 or 20 or 30 years interest rates can move. That is the only advice I give

people. The average interest rate under this Government I think is about a

7¼ per cent, so we are still below the average of this Government.

The average rate under the previous Government was 12¾. So these are

still historically low rates and I say to people, bear that in mind.


Does that mean we are going to need to have a couple of more rate hikes

to take the steam out of the housing market?




Given they are still historically low.


Well, monetary policy doesn’t target housing prices and it never has.

Monetary policy targets inflation and the general economy. Now, I have noted

before that inflation is not a risk, the Bank takes an optimistic view of

the world economy. The world economy is coming back. But until you call conclusively

that the world economy is back I think we would like to see a bit more of

jobs growth in the United States and I think we would like to see a bit more

evidence in Japan that their stalled recovery can continue.

Last question.


(inaudible) quite wary, and you just talked about your concerns about Japan,

I mean, do you share the Bank’s optimism in its statement today?


Well, it is an optimistic statement. I believe, yes, that the United States

is out of recession and growing, but they are still something like two million

less jobs than they had three years ago. And there is no evidence yet that

sustained recovery in the United States is leading to jobs growth. Yes, Japan

has recorded some positive quarters but you have got to look very carefully

behind the statistical reasons why. Then we move to Europe, maybe some of

the European economies are moving out of recession, but they are not showing

anything like substantial growth. They are not looking at growth rates of

2 or 3 per cent. So, overall, the world has turned, yes, it has turned out

of recession. But I still think it is a faltering recovery in world terms.

I hope that the US economy and others rip back, I certainly do, but I wouldn’t

call it yet.