Press Conference

Treasury Place, Melbourne

Wednesday, 27 April 2005
12 noon

SUBJECTS: March quarter Consumer Price Index, Sheik Faiz Mohamad’s

comments

TREASURER:

Today’s Consumer Price Index without question is good news for Australia.

It shows that in the March quarter the Consumer Price Index increased by 0.7

per cent and through the year by 2.4 per cent. A yearly increase of 2.4 per

cent shows that inflation remains moderate in Australia, notwithstanding the

fact that we are now at unemployment levels which are as low as they have been

in 30 years. And more importantly, the outcome of 2.4 per cent is just about

bang in the middle of the target that we have of 2 to 3 per cent.

In relation to the Consumer Price Index, there are a lot of measures that moved

down, for example clothing and footwear and motor vehicles, both no doubt influenced

by the fact that tariffs were reduced on 1 January of this year. There were

some areas that moved up, in particular in pharmaceutical benefits, that is

because the March quarter is traditionally a high pharmaceutical benefit quarter

because the safety net has run out at the end of the calendar year. In relation

to education, we also saw some price increases no doubt influenced by the fact

that HECS fees rose as a result of the new freedoms for universities in relation

to fees.

When you look through these figures however you don’t see any general

inflationary pressures. We had a report yesterday in relation to producer prices

which also showed the final stage of producer prices were very flat. And so

the picture that we get out of today’s figures is notwithstanding a strong

economy, notwithstanding unemployment falling to lows of 30 years, price pressures

remain contained in the Australian economy showing a growth economy with subdued

inflation.

JOURNALIST:

Do you expect Treasurer that inflation will now stay within the Reserve Bank’s

target band making any further interest rate changes unnecessary?

TREASURER:

I don’t think you could see in these figures any general outbreak of

inflation, nor are we forecasting any over the next 12 months, in the next financial

year, 2005-2006. So, I see a good outlook in relation to keeping inflation moderate

and of course we will be confirming our forecast when the Budget comes down

in May.

JOURNALIST:

(inaudible)?

TREASURER:

Well, in Australia as you know we have set our monetary policy according to

an agreement which has been entered into between the Governor of the Reserve

Bank and me, that is to target an inflation rate of between 2 and 3 per cent

over the course of the cycle. You have got an outcome today which is 2.4 per

cent, obviously within that band. When you are looking at monetary policy you

are obviously trying to look through the year and maybe look out 12 months,

maybe look out 18 months, but you would have to say in relation to these figures

that the outlook there is for continuing moderate inflation. So that is a pretty

good outcome in a growth economy which is now at 30 year lows for unemployment.

JOURNALIST:

The Treasury Chief Ken Henry yesterday apparently was warning the Reserve Bank

against raising interest rates saying that could lead to a recession, do you

agree with him?

TREASURER:

I don’t think it is right to say he was warning anybody. I think what

he was saying yesterday was he was giving an assessment of the stage of the

economic cycle and I think what he said yesterday was very much in line with

my own thinking that there has been this tendency in Australia to (inaudible)

with extreme scenarios of one day the economy is racing away uncontrollably,

the next day we are facing a crash. Sorry to disappoint economic journalists

but the truth of the matter is that we are somewhere in between. We have had

a strong growth economy and although it is probably not growing as fast as it

was a year or two ago, there is still a bit of oomph in that economy and that

is a good thing.

JOURNALIST:

Are petrol prices the key risk going forward? This figure includes a slight

fall in petrol prices but after the quarter they have obviously started going

up, is that the key risk going forward?

TREASURER:

Look I think in this quarter, that is the June quarter, petrol prices will

have risen again, we all know that from the pump, and whilst you have got petrol

prices detracting in the March quarter you would expect petrol prices to add

in the June quarter. But we know that the petrol price is just a function of

the world oil price, we know that world oil prices are going to go up and are

going to move around. When you are looking at inflation, you are generally trying

to look through those factors, you are generally trying to look through and

to find out what the underlying position is, so I wouldn’t place too much

store on the fact that petrol detracted this quarter anymore than I would place

store on the fact that it is likely to add in the next quarter. What we are

trying to do is we are trying to look through those commodities which vary according

to world cycle, we are looking for what is happening in the underlying economy.

And I think as you look at what is happening in the underlying economy, you

would see a moderate inflation outcome.

JOURNALIST:

Mr Costello, just on another matter. I don’t know whether you heard the

comments, there were comments aired on radio this morning from Sheik Faiz Mohamad

who is a cleric in Sydney. He has suggested that the way Australian women dress

makes them, and I quote ‘eligible for rape.’ I wondered whether

you had a response to a comment like that.

TREASURER:

Well I have seen comments reported in newspapers that somehow the dress code

of Australian women invites sexual attack or unwanted sexual attention. And

if such comments are made I consider them totally inappropriate, untrue and

unhelpful. Australian women are free to dress in the western style and nothing

gives an excuse for them to be molested in anyway. This is Australia, women

are free to dress as they choose and they deserve to be safe on our streets

and in our parks and they are entitled to respect. And if anybody does suggest

that somehow being molested is acceptable or excusable because of the way in

which women dress they are wrong.

JOURNALIST:

Coming back to Dr Henry Treasurer, he also apparently said that short term

changes in fiscal policy don’t really have any effect on monetary policy.

Does that mean that there is room for further tax cuts in your Budget?

TREASURER:

I think the important thing in relation to fiscal policy is to get some idea

of dimension. If you were running budget deficits, yes of course that would

put pressure on interest rates, but we are not in Australia, we are running

budget surpluses – unlike the Americans and the British and the Europeans. So,

Australia starts off so far in front of Britain and Europe and America and Japan

that we are almost in a different category. If we were running a budget position

like they are, then yes, the dimension of that would be such as to have a significant

influence. The second point I would make in relation to fiscal policy is the

important thing is how it varies from year to year as to whether it has been

tightened or whether it has been loosened. A lot of people overlook that fact.

You get a lot of silly commentary coming out of people like the Labor Party

that overlook that fact, but that is the key ingredient here.

JOURNALIST:

Treasurer, you are saying that wages pressure remains contained so you may

no longer see the possibility of wage claims putting upward pressure on interest

rates, you no longer see that?

TREASURER:

I have always said that if wage claims get out of whack with productivity that

would be a big pressure on the Australian economy.

I have always said that if people think, not based on productivity, they could

have a five or a six per cent per annum wage claim, that would be a risk. To

date we haven’t seen that. We have seen some people making ambit claims,

we have seen a few instances of where it has happened. But my warning is, do

not take that into the general economy. That would be a problem for the general

economy and I would say to people, you can still have a real wage increase,

on 2 per cent inflation. You can still have a real wage increase of 3 and

4 per cent and once more that real wage increase of 3 and 4 per cent backed

up by productivity will be consistent with the economy continuing to grow but

anyone who thinks out there that they can take advantage and got for 6 or 7

or more, and if that became widespread in the Australian community that would

be a problem. Yes.

JOURNALIST:

Some analysts have interpreted Ken Henry’s statements as he was referring

to interest rates potentially going up next week. To those people would you

say or could you say whether or not you think it is appropriate that he should

be giving hints like that when he actually sits on that Board?

TREASURER:

Well Ken Henry is Treasury Secretary, he makes a very strong contribution in

that capacity. He is obviously one of the senior economic officers in the country

and he is as entitled to have his view on the economy as the Reserve Bank Governor

or any journalist or any banker or the people who seem to be absolute experts

on everything these days, bank economists. So, absolutely I would defend his

right to make a contribution.

JOURNALIST:

And how are you feeling gearing up to your, is it tenth Treasurer?

TREASURER:

Yes it is.

JOURNALIST:

How is it going?

TREASURER:

Well we are working hard.

JOURNALIST:

How is the mood going.

TREASURER:

We are working very, very hard and in little under two weeks time all will

be revealed. Thank you very much for your time.