Peter Costello

Media Transcripts

Interest rates; economy

TRANSCRIPT
of
THE HON PETER COSTELLO MP
Treasurer

Interview with Kerry O'Brien
7.30 Report
Wednesday, 5 June 2002
Live to air

 

SUBJECTS: Interest rates; economy

O'BRIEN:

Peter Costello, I assume you agree with the Reserve Bank Governor, interest rates should rise?

TREASURER:

Well, interest rates rose today by 25 basis points, coming back to the level they were prior to the 11th September 2001, the terrorist attack on the World Trade Centre. The bank made the point, and I agree with it, that with the US economy in recession and a shocking terrorist incident, the worst we have ever seen in our lifetime, it became necessary for monetary authorities, not just in Australia, but around the world, to cut rates. It looks like the US has now stabilised, that it's growing again. That the world economy is picking up, and as a result you can reverse those two movements, those post September the 11th movements, in interest rates.

O'BRIEN:

But the Reserve Bank Governor has gone much further this time, hasn't he, in terms of what he's said to the Parliamentary Committee last Friday, extremely candid, in saying, that he thinks that interest rate settings should return to what he regards as neutral settings, and he then spelt that out, and if you extrapolate that, we're clearly headed for several more interest rate rises over the next few months, over the next 6 to 12 months?

TREASURER:

Well, I don't think you can speak with any great certainty in relation to these things, Kerry. What happens with monetary policy, is, you sit down and you make an adjustment, you assess the situation. You, you assess how the moves that you have made, are affecting the economy. You want to know a few things in the future. You want to know whether or not the economy is still performing strongly, you want to know what pressures there are in relation to inflation, and the like, and you will take all of those things into account. So, I am not in that school that says, oh we can predict with certainty the next year, or the next 2 years...

O'BRIEN:

Well, not absolute certainty...

TREASURER:

...and of course I can't do it anyway. I am not allowed to do that.

O'BRIEN:

Can you remember a time a Reserve Bank Governor has ever been as candid and as clear about his immediate future intentions as Ian Macfarlane was last Friday?

TREASURER:

Well, I can remember occasions when the Bank's given a very clear steer that it intends to move in one direction and then something happens and it reverses and it turns around again. Why? Because circumstances have changed.

O'BRIEN:

But one reason underpinning his sentiments, that again he's made very clear, has been the overheating of the housing markets, this extraordinary housing boom that we've been through, and what he has said, is that he will keep raising that rate by increments until that is under control?

TREASURER:

Well, can I make two points here, one is, I think that there has been a bit of exuberance around about the Australian economy. The Australian economy is strong. Okay, it is growing at 4.2 per cent. It is the strongest of the developed world and it's above our long term growth rate. But, it's 4.2 per cent and it's strong. I wouldn't be in the category that said it's overheating. Can I come to the real estate market? It is true that real estate prices have gone up very significantly, particularly in Melbourne and in Sydney. And, one of the worrying things appears to be that some people are buying now, even though they think, you know, it's very high because they are expecting this rate of increase to continue. And I guess the message to those people is, you don't have to feel under any pressure, the rate of increase will not necessarily continue at the same rate. There has to be some stabilisation in these markets because they have moved so far. And it's really a reassuring to the housebuyers in relation to those prices.

O'BRIEN:

You, quite rightly point out, that Australians are enjoying historically low housing interest rates, but by the same token, do you acknowledge Bob McMullan's point that, as a proportion of income, many Australians are now paying more, to repay their mortgages than they have in the past?

TREASURER:

Well, look, it's a statistical type of trick. The fact of the matter is, that house prices have gone up, very, very considerably. And people borrow...

O'BRIEN:

And so have mortgages, yeah.

TREASURER:

...and people borrow against their house price, that's right. So they have got a huge increase in their assets. Now people have borrowed against their house prices, people have borrowed a lot. Why? Because interest rates are low. Why do you have low interest rates, so people borrow.

O'BRIEN:

Yeah, but doesn't that then make...

TREASURER:

That's the whole point...

O'BRIEN:

...doesn't that then make them more vulnerable? Doesn't that make them more vulnerable when interest rates edge up?

TREASURER:

Well that is why you have always got to make the point to people, this is the point I continue to make Kerry, these are the lowest interest rates in 30 years, these are the lowest mortgage interest rates in 30 years. And people would be misguided if they think that you can just have the lowest interest rates in 30 years which keep on declining. I can remember the day, and I keep reminding everyone, when I bought my first house the mortgage interest rate was 17 per cent. And so, when I look at 6 ½ per cent, and anybody who lived through those Labor years remembers the 17 per cent, I look at 6 ½ per cent, I say to myself, lowest in 30 years, but build in a margin. And I would say that to other house buyers. You can not expect interest rates to be the lowest in 30 years and continue to decline. These are historical rates, so build in a little bit of a buffer. Now with reduced rates, so you could borrow more, and there is no point turning around and saying, we have got low interest rates, that people borrow, but build in a buffer.

O'BRIEN:

In terms of the rest of the economy though, there's obviously some disquiet amongst a number of the other industry groups about the juggling act that Mr Macfarlane is now going to go through in trying to take the heat out of some aspects of the economy without flattening other aspects. That is a juggling act isn't it, a really fine line?

TREASURER:

Well, I have made the point about housing prices, particularly in Melbourne and Sydney, but to be frank with you Kerry, I don't think we, there are other areas of the Australian economy which look particularly overheated. We have got good consumer demand, we have got contribution from exports, the housing, the house building cycle is probably coming off and business investment is picking up. Now, I would like a stronger US economy and I would like a stronger Japanese economy, but having said all of that, this is an economy which is growing strongly, sure, and it is the strongest in the developed world. But you do not see too many areas where there is evidence of severe overheating.

O'BRIEN:

You have obviously been very happy with export growth, but hasn't that been boosted by an extraordinarily low Australian dollar against the Greenback, and our dollar is now bouncing back, won't that have the opposite effect on exports?

TREASURER:

Well sure. One of things that protected us during the global slow-down and the US recession was the exchange rate and I think we were getting criticised at the time, but I kept on pointing out that it had been a great protection. That's now coming back, or, to put it another way, Kerry, the US dollar is now coming off which amounts to the same thing. That will have an adverse effect on our exports, that is right. But, the fact that the world is getting stronger means that there will be more buyers for our exports and that will be a positive thing.

O'BRIEN:

Do you also have a concern that some aspects of the rural and regional economy, farmers, who aren't, you've got the capital cities enjoying a property boom but out in the bush where they have been enjoying increased earnings because of the export boom, because of the lower dollar, they are now going to be hit with a double whammy - higher interest rates and a higher dollar?

TREASURER:

I think you make some fair points there too. That, what we have seen in the last year is probably the best year for Australia's farmers in 10 or more years, and that was today's national accounts the growth in income amongst small business was the highest yearly growth since the 1980s. I think the problem for farmers is going to be world prices, I agree with you on that, but also one of the things that we are going to have to keep an eye on is drought. There is severe drought in the eastern parts of Australia. And, you know, I feel sorry for the poor farmers, you know, they get a good year and it seems as if the seasons take it away again and it is something we are going to have to keep an eye on.

O'BRIEN:

But if interest rates keep going up they're going to keep getting slapped down?

TREASURER:

Well, well, interest rates today are at 30 year lows. It is much better than it was at any time in the eighties, or the nineties, Kerry.

O'BRIEN:

Peter Costello, thanks for talking to us.

TREASURER:

Thank you.

5 Jun 2002

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