Peter Costello

Media Transcripts

Interest Rates; Reserve Bank; International Economy; Inflation; Property Market - Radio Interview - Stephen Long, AM ABC

TRANSCRIPT

THE HON PETER COSTELLO MP

Treasurer

Interview with Stephen Long
AM, ABC

Thursday, 6 November 2003
8.00 am

(Pre-record)

 

SUBJECTS: Interest Rates; Reserve Bank; International Economy; Inflation; Property Market

PRESENTER:

But first this morning, as Australia digests yesterday's surprise interest rate rise, the political debate about the direction of rates from now on has begun. With financial markets expecting at least one more increase in the next few months, the Prime Minister, John Howard, overnight questioned

the need for a significant rates rise. And the Treasurer, Peter Costello, has told AM this morning that he shares that view, while also saying that he thinks the RBA may have misread the strength of the farm sector after the drought. Peter Costello spoke a short while ago to our finance correspondent Stephen Long.

LONG:

Peter Costello, thanks for your time this morning. Do you think there's an immediate threat of an inflation break out?

TREASURER:

No, I don't think that inflation is a worry in our economy, inflation at the moment is about 2.6 per cent, we think that if anything there's going to be downward pressure on inflation and that is an assessment that is also shared by the Reserve Bank. No, we've got, we've got solid growth but it is low inflationary as well.

LONG:

So what is the case then for the Reserve Bank to be lifting rates now, do you think they made the right decision?

TREASURER:

Well, you've got to look at the statements that they make. They are an independent bank, let me make that point, and they make a statement as to what the influences on them are. And the principle influence is that they think there is a world economic recovery going on and as a consequence, monetary policy, interest rates, don't have to be as expansionary. Now undoubtably the American economy is coming out of recession, we've seen some positive signs out of Japan. I am not sure that the drought is over, the Bank has taken a pretty robust view on that, the drought is over in some areas but it is not over in all areas. But they take the view that with the world economy picking up and prospects picking up in Australia that monetary policy, that is interest rates, don't have to be as expansionary.

LONG:

It is normally the job of the Reserve Bank to fight inflation and there's an agreement between the Government and the Bank about keeping rates within a two to three per cent target range. Now they've acknowledged in the Reserve Bank statement yesterday that there is no short run threat of inflation breaking out beyond that target range. So why move? Why should they move? Are you critical of the decision?

TREASURER:

No, look, the Bank makes independent decisions and I don't complain about that because I put it on an independent basis. This is my policy. It is not my decision but it is the structure, it is done under the structure which I put in place. Now I don't believe inflation is a threat and I don't think our inflationary target is at risk here. What the Bank believes is that with the world economy picking up, with the drought passing, although I've said you should be very careful about that point, that you're going to see increased strength in the Australian economy and as a consequence of that your interest rates don't have to be as expansionary. That is the view that they have taken. Now, I hope that the emerging recovery around the world does pick up pace, that would be good for all of us, it would be good for our exporters too incidentally, who would find new and better markets overseas, but that's just something that we will have to wait and see and hope that it comes about.

LONG:

John Howard said last night, there's no case for a significant rates increase, particularly with inflation curtailed within the target range. Do you agree?

TREASURER:

Oh, I don't see any risk to inflation, and I agree, yes, that inflation is moderate, that I don't see any pressures emerging on that front, what's more the Reserve Bank agrees, they make that quite clear in their statement.

LONG:

By saying that though, that there is no case for a significant rates rise, isn't John Howard trying to browbeat the RBA and encourage them not to lift rates further in the lead up to the next election, the coming election?

TREASURER:

Well, I want to be very clear about this point, because this is a structure which our Government, and me in particular, put in place, that the Bank in independent. But that doesn't mean that people can't express their views. We've made this entirely clear, the Government is going to comment on the economy, of course it is, and that will lead to a robust debate and not everybody is going to agree. But at the end of the day the decisions will be the Bank's. Now, nobody, no person, no institution, no bank, should think that its decisions can't be scrutinised and debated, of course they can be and they're going to be and they should be, but at the end of the day it will make the decisions.

LONG:

But as far as you’re concerned you can see no case for further rates rises?

TREASURER:

I have not said anything about future directions in interest rates and …

LONG:

Well, well you just did.

TREASURER:

No, I have not said anything about future directions in interest rates and I never do. And I don’t talk about what is going to happen in the future. I will give you my assessment of the economy, which I just have. But you are wrong to say I just did talk about interest rates.

LONG:

Your colleague Nick Minchin said recently that the Reserve Bank would be mad to lift rates to bust the housing bubble. In the absence of a threat to inflation it was the job of the Reserve Bank to, to fight inflation. Isn’t that precisely what the Reserve Bank’s doing now? They’ve cited strong credit growth and rising household debt levels as one of the significant reasons for making this move.

TREASURER:

Look, monetary policy doesn’t target house prices. I made this point yesterday, I will make it again. Not only is it a point that I make, it is a point that the IMF made. Monetary policy isn’t directed at house prices. Monetary policy is directed at inflation, employment and economic growth. Now, we have discussed inflation, I don’t think inflation is a risk. Employment is quite strong. Economic growth has been solid and will be stronger if a weak global growth strengthens. Now, these are the matters which the Bank takes into account.

LONG:

But the RBA has made it clear that one of its big concerns is credit growth and the huge rate of credit growth and credit outstanding growing at 20 per cent a year for households, now that is largely a product of asset prices and house prices is it not?

TREASURER:

Well, it’s a product of the fact that interest rates are low. You can’t complain that people borrow if interest rates are low. That is why you have low interest rates, so people can get financial accommodation. But I make the point as the IMF made, that monetary policy doesn’t focus on house prices. You are dealing with a whole economy, you are looking at economic growth, employment and inflation. That’s what you look at in relation to monetary policy. And I think if you look at the statement of the Bank, it is patently clear, the fact is that it’s taken into account, the first one it talks about is a merging global recovery.

LONG:

Alan Wood commented in the Australian today, that this the first central bank to start lifting interest rates in an economy with record household debt, a housing price bubble, a rapidly rising exchange rate and low inflation and nobody including the Reserve Bank is sure what will happen. Do you agree that the RBA is in unchartered territory?

TREASURER:

No, I think the RBA is making economic decisions in its area of responsibility and doing it to the best of its ability just as the Government is making economic decisions - on a far wider scale I might say - in its area of responsibility. Now, these things are never easy, but let me say, having gone through an Asian financial crisis, a US recession, the worst drought in one hundred years, I know that big challenges come all the time, and I think I would rate all of those challenges a little higher than the challenges of an emerging global recovery which we are seeing at the moment. Now, an emerging global recovery, as I’ve said earlier, is actually a good thing. It’s actually a good thing. That will be good for all of us because it will mean that our exporters will get markets. Now, you’ve raised the exchange rate, yes, that is making things more difficult for our exporters. But if there is an emerging global recovery they might be able to get stronger markets. So, look, economic decision making always has its challenges, but that is why we have institutions which are designed to actually deal with those challenges, and deal with them well.

 

6 Nov 2003

View more media transcripts …

Latest News

Paris Diary

Peter Costello Paris Diary

Read more …

PPI - Rising Role of Sovereign Wealth Funds

Peter Costello Rising Role of Sovereign Funds Speech

Read more …

The Hole Truth

Peter Costello in the Daily Telegraph

Read more …

Videos

Video Screenshot

Watch videos …