Wednesday, October 24, 2007

Laughter in dealing rooms throughout the country

Peter Costello has just opened a press conference saying that inflation is well within the Reserve Bank's target band.

I have put the entire transcript of his press conference below. It is quite something.

Also below is his press release. My favourite phrase reads "underlying inflation is expected as demand pressures ease".


TREASURER:

The Consumer Price Index rose by 0.7 per cent in the September quarter and by 1.9 per cent over the course of the year. The major contributors to inflation were food, particularly fruit and vegetables and this is largely a result of the drought and low water allocations in the Murray-Darling Basin. Contributors were also in the housing area. Those things that detracted from inflation in the September quarter were fuel prices which decreased in the course of the September quarter and in addition childcare. Childcare prices decreased in the September quarter – largely a result of the fact that the childcare tax rebate changes which the Government announced in the Budget, bringing forward a rebate in relation to out-of-pocket costs.

This of course is a very low average inflation rate, annual inflation rate, at 1.9 per cent and the 0.7 per cent in the September quarter is really right bang in the middle of the target range which the Government has set for consumer price inflation. Other measures of inflation, more technical measures, are up around the upper limit of the band, although the band is in fact the consumer price band that the Government has set.

The fact that Australia is still running a Consumer Price Index inflation rate below 2 per cent at a time when unemployment is at 33 year lows is really quite remarkable in the sense that it shows that notwithstanding continuous growth and notwithstanding very strong job growth over recent years, inflation is still moderate in the economy. To give you an example, in previous terms of trade rises in the 1950s, inflation peaked out at 22 per cent, in 1974 it peaked out at 16 per cent. And the fact that we are still around 2 to 3 per cent at a time when we had strong terms of trade increases and very low unemployment is really a very strong achievement.

The difficult news I think for consumers in relation to fruit and vegetable prices is that they have contributed to inflation, that there are pressures there. The pressures are principally arising out of the drought and unfortunately, until such time as water allocation comes back and production increases, there is going to be pressure in relation to fruit in particular.

The Australian economy is undergoing a very, very significant investment phase at the moment. And it is our view that as this investment starts to work out in stronger capacity we will see rising growth and rising productivity as we have already seen in the last few quarters.

Let me make it clear that in order to manage an economy which is now running strongly with very low unemployment, it is important to have a plan to build capacity. The plan that I announced Monday week ago is all about building capacity for the Australian economy – in particular, encouraging people to join the workforce; making it easier for working mothers to take part-time work – it is a plan which will build and deliver additional capacity. That is the way it has been designed and its implementation will build capacity in the Australian economy.

Secondly, the plan for Australia’s economic future involves a flexible industrial relations system. If we were to go back to union control of workplaces and go back to pattern bargaining and moving wages by awards from profitable to unprofitable sectors of the workplace, you would unleash such inflationary pressures in this economy as would end in recession as has always happened in past periods of economic growth in Australia.

The industrial relations changes which have been out in place are absolutely critical for managing the economy into the future. And a political party which wants to reverse those changes is a political party that would unleash inflation and ultimately, as a consequence of that, economic downturn on the Australian economy.

I can’t stress enough how important it is in a situation where we now have unemployment at 30-year lows and where we have a strong terms of trade, that we have an industrial relations system which is flexible and can handle that. And anyone who wants to be a political leader who doesn’t understand that, doesn’t understand a fundamental reform of this economy and doesn’t understand what is required to manage it in the days ahead. That is why the Government has been reforming in industrial relations and that is why those industrial relations changes are important for Australia’s economic future.

JOURNALIST:

Can you just (inaudible) Mr Costello, you are saying that if Kevin Rudd gets elected and Labor implements its industrial relations policy, the Australian economy will go into recession?

TREASURER:

I am saying that if the industrial relations policy of the Labor Party is implemented and if we abolish AWAs and we return to award fixation, you will get in this country a breakout of inflation, as you have done in previous times when unemployment has been low. And a breakout in inflation ends in economic downturn. Now, there is a reason why the economy has grown continuously over the last near 12 years and that is because we have been putting reforms in place including industrial relations. If those reforms are replaced, it is a risk to inflation. And inflation generally ends in an economic downturn.

JOURNALIST:

But you mentioned recession before, is that what you are saying?

TREASURER:

Well, an economic downturn, yes. Where growth would decline and where you would be at risk of growth going negative, yes. If you got a breakout of wage inflation you would see a return as we saw in the ‘70s, in the ‘80s and in the ‘90s to an economic downturn. And the reason why we haven’t had one in the last 11 and 12 years, is because we have been putting in place reforms to handle continuing economic growth. And if you turn your back on those reforms you will go back to where we were.

JOURNALIST:

Treasurer, can we take the flip side of that argument, the reforms that you have laid out, are they going to make Australia recession-proof?

TREASURER:

I am never going to stand up and say that there is no risk, that Australia will never have a recession in the future. You can have external effects which can shock an economy. But let me make this point: we had an Asian financial collapse and we kept the Australian economy growing. We had a US recession and we kept the Australian economy growing. We had a one in a 100 year drought and the Australian economy kept growing. So we have had some big external shocks. Now we are having an increase in our terms of trade and it will require very delicate and experienced management. And if you want to turn your back on industrial relations reform, you won’t be able to manage it.

JOURNALIST:

Mr Costello, if the Reserve Bank chooses to raise interest rates at the next board meeting, does the Bank risk appearing political to raise rates during a campaign?

TREASURER:

Well, I am not going to get into advising the Bank. The Bank is independent. I put it on an independent basis, that was my decision. And I gave it a charter and the charter is ‘to have consumer price inflation between 2 and 3 per cent on average over the cycle.’ That is its charter and that is what it is charged with doing. Now, consumer price inflation was 0.7 per cent in the September quarter. Annualised that is well within the band for consumer price inflation of 2 to 3 per cent. Now, all of these things will be taken into account but I won’t be advising the Bank on how to conduct its role.

JOURNALIST:

But your opinion looking at the figures, your own analysis is that there is not a need, an economic need for an interest rate rise?

TREASURER:

Well when I look at these figures I see Consumer Price Inflation at 0.7 per cent in the September quarter. I see other measures which are a little higher but I see all of these measures of inflation 2 to 3 per cent and the target that we are aiming for is 2 to 3 per cent. And when I look at these figures I also note that with this strong investment cycle we are now building additional capacity in the Australian economy and I see that capacity working out in increased productivity and I see it working out by enlarging the capacity of the Australian economy in the years ahead.

JOURNALIST:

Treasurer, (inaudible) inflation (inaudible). I am sorry, on the Reserve Bank’s measure of core inflation which is the first number they look at when they are setting the policy, it is pushing to that 3 per cent boundary, it is about 2.9 I think, the target for the (inaudible).

TREASURER:

Yes, as I said, the Consumer Price Index is 1.9, there are other measures that are towards the upper band, towards 3 per cent. When you look at all of these measures you can vary bit by bit. But all of them are around 2 to 3 per cent. That is the point I make.

JOURNALIST:

The Reserve Bank very clearly focuses on the weighted and mean average and they are at 2.8 and 3 per cent which is right at the top of the band. Why are you focussing on the headline figures?

TREASURER:

Well I am just reminding you what the monetary policy is in Australia which is keeping consumer price inflation between 2 and 3 per cent on average over the cycle. That is the goal. That is the goal of monetary policy in Australia.

JOURNALIST:

Do you regret giving the Reserve Bank its independence?

TREASURER:

No, I think it was a very essential reform for Australia. It is something that I did in 1996, it is something that I re-endorsed when I appointed the new Governor, Glenn Stevens. I think it has been a very critical reform for Australia. It was very controversial when I did it. The Labor Party threatened to sue me. But you will notice that now, Kevin Rudd supports that policy. It would have been nice if he had supported it at the time but it is another case of ‘me too’ from Rudd and I think that illustrates the fact that it was a good policy.

JOURNALIST:

If there was an interest rate rise during the campaign, that would certainly mean that the death knell for the Government’s campaign, wouldn’t it?

TREASURER:

Well I think it is a strange question.

JOURNALIST:

But how damaging would an interest rate rise be for the Government?

TREASURER:

Well let me make this point: interest rates are lower today then when I became Treasurer and that is after 2.2 million more jobs. Now, you know, to think that after 2.2 million more jobs interest rates could still be lower than they were when we had, I think, 8.6 per cent unemployment shows you how far the Australian economy has come. Normally what would happen is as you get more jobs you would expect to there to be more pressure and interest rates to be higher. But to think we’ve had 2.2 million more jobs in Australia, the unemployment rate has halved, and the official interest rate is lower than it was in 1996.

JOURNALIST:

What is the message for spending in these figures?

TREASURER:

Well, I think the message here for consumers is that …

JOURNALIST:

No, government spending, or political party spending.

TREASURER:

I will just finish my answer, if I may. I think the message here for consumers is that consumers are confident. There is no doubt about it. And consumer demand is quite strong. But there are areas where supply is driving up prices and I think fruit and vegetables, particularly because of the drought, is one of those areas. And unfortunately there is just not much you can do about that. I sympathise with people.

From the point of view of Government spending, this is the point I would make. We are going through a huge investment surge in Australia at the moment. The private sector is putting more money into investment than we’ve ever had. That’s a good thing. That is building capacities. But the Government ought to be quite careful that at a time when you are having a huge private sector investment surge, it isn’t in there heating up costs. I think that is very, very important. This is the point I’ve been making as to why governments should be running surplus budgets. It is all very well for State Governments to say ‘oh, we’re running up a $70 or $80 billion worth of debt but that’s okay because we’re out there in the business of infrastructure’. You have got to bear in mind the private sector at the moment is building infrastructure as never before in our country. And if the Government is adding to that, that does, in areas of shortage, put price pressure. So I would say the message for government, Commonwealth Government and State Government is that at this particular time you should be running a budget surplus. That’s the message. That’s why the Commonwealth does run a budget surplus but the Labor Governments are running budget deficits. That is not a wise decision at a time like this in my view.

JOURNALIST:

Treasurer, (inaudible) banks raising their interest rates ahead of rises in official rates?

TREASURER:

Well you’ve got different markets. You have got the home mortgage market and you have got business lending. Now, the point I make is in the home mortgage market there are no grounds whatsoever for banks to raise variable mortgages, right. They have a big deposit book. They have not had any increase in official interest rates. It may well be that they don’t discount as much as they used to do but there are no grounds whatsoever to move variable mortgage costs.

Now, in the business lending market, the banks may well be suffering increased cost of funds and in that market there may be grounds for some banks - some banks - if they are exposed particularly to raising their funds internationally, to take that into account. I am not making any comment in relation to the business lending market, but I am making a comment in relation to the mortgage market. There are no grounds at all.

JOURNALIST:

…inflation figures is a rise in bank fees. Is that a concern to you?

TREASURER:

Well I think it is important that banks do keep their fees low, yes. I have written to the Australian Bankers Association. I have raised the issue of bank fees with them. I welcome the fact that most of the banks now have cut their – I think they call them – exception fees. These are the fees that they charge you for a cheque bouncing. The fees that they were charging bore no relation to the actual cost to the bank. As a consequence of that, most of the banks have now reduced those fees. But I do think that there is still room for more competitive products from the banks, I do. And I have written to them and urged them to consider them. Now some of the banks have actually gone some way to having more competitive products.

JOURNALIST:

Are you concerned that the election campaign has become a very expensive auction?

TREASURER:

Well, I don’t regard it as an expensive auction. Look, the Government announced a tax plan on Monday of last week, which will get more people into the workforce at lower marginal tax rates and build capacity. It is a plan for Australia’s economic future. Five days later, the Labor Party copied 91.5 per cent of it. Now, if someone copies your work 91.5 per cent you can’t complain, can you, because they are basically saying that you had it right and they are saying they would like to join you.

JOURNALIST:

But there has been other spending…

TREASURER:

I complain that the 8.5 per cent that they didn’t copy is far worse than my plan. I complain about that. And in fact it will leave 45 per cent of Australian taxpayers worse off, those people between $37,000 and $102,000, so I complain about that. Now in relation to other matters, it is our objective to keep the Budget in surplus and to have surpluses around 1 per cent of GDP. I think that is prudent and responsible.

JOURNALIST:

Treasurer, taken your harping about the inflation risk under a Labor Government, under their workplace amendment, if you could put a hypothetical hat on for a moment, if I could just ask you…

TREASURER:

Very dangerous thing to ask me to do, George.

JOURNALIST:

…. Kevin Rudd becomes Prime Minister. Do you think the Reserve Bank, having heard what you’ve said, will probably think the same way and greet an incoming Labor Government with an interest rate rise, to head off, or a shot across the bow in inflation?

TREASURER:

Let me answer the question this way. Glenn Stevens, and before him, Ian Macfarlane made it perfectly plain that flexible industrial relations was absolutely critical for managing monetary policy. The quote that Ian Macfarlane had was to the effect that the more flexible your industrial relations system, the more it makes the task of monetary policy easier. Glenn Stevens has said the same thing. There will be no doubt at all that a reversal of industrial relations policy, under the direction of the trade union movement by Kevin Rudd, would cause problems for the Australian economy and would cause problems for inflation. That is my view, it is the view of reputable economists and it is the view of the Governors of the Reserve Bank.

JOURNALIST:

Would that be quick? How long would it all take in your view?

TREASURER:

Well, it depends…

JOURNALIST:

You know their timetable for putting legislation into…

TREASURER:

Well, look, it depends, you know, how quickly they move to reverse industrial relations and, you know, how aggressively they go, the unions go about using the new …

JOURNALIST:

So we’ll be in a bad way in a year’s time?

TREASURER:

Well, it depends as I said on how quickly they go about reversing industrial relations and how militant the unions get. You know, you’d begin to feel it first on building sites, I would think, where the militant unions would be first out of the blocks. Joe Reynolds and others – Kevin Reynolds, Joe McDonald. All right, we’ll make this the last question.

JOURNALIST:

Mr Costello, can John Howard win the election?

TREASURER:

Well I think this election is very open and I think this election could still be won by either side of politics. I think there is still something like four and a bit weeks to go and a lot can happen in four and a bit weeks. Okay. Thanks.

PRESS RELEASE: CONSUMER PRICE INDEX – SEPTEMBER QUARTER 2007

Today’s All Groups Consumer Price Index (CPI) rose by 0.7 per cent in the September quarter 2007, to be 1.9 per cent higher than a year ago. Major contributors to inflation in the quarter included housing, food (in particular fruit and vegetables), financial services and recreation. These increases were partially offset by lower household services, automotive fuel and audio, visual and computing prices.

Excluding volatile items (fuel, fruit and vegetables) the CPI rose by 0.7 per cent to be 2.6 per cent higher through the year. The Reserve Bank of Australia’s Trimmed mean and Weighted median measures rose by 0.9 and 1.0 per cent respectively in the quarter, to be 2.9 and 3.1 per cent higher through the year.

The food component of the CPI increased by 1.9 per cent in the September quarter and contributed 0.3 of a percentage point to quarterly inflation. This was largely driven by strong increases in fruit and vegetable prices (up 8.8 per cent), reflecting unseasonal weather conditions. Current pressure on food prices reflects unfavourable weather conditions and low water allocations in the Murray-Darling Basin.

Housing costs rose by 1.8 per cent in the September quarter and contributed 0.4 of a percentage point to quarterly inflation. This reflected increases in both rents (up 1.6 per cent) and house purchase prices (up 1.0 per cent).

Financial and insurance services prices rose by 2.0 per cent and contributed 0.2 of a percentage point to quarterly inflation. This was due to significant increases in both deposit and loan facilities and other financial services prices.

Automotive fuel prices decreased by 3.7 per cent in the September quarter and subtracted 0.2 of a percentage point from quarterly inflation. Other major subtractions from quarterly inflation include household services (down 9.0 per cent) and audio visual and computing prices (down 1.2 per cent).

Child care prices decreased by 33.4 per cent in the September quarter and subtracted 0.2 of a percentage point from quarterly inflation. This was due to the impact of the inclusion of the Child Care Tax Rebate in calculating the “net” change in childcare cost for the first time and the additional 10 per cent indexation of the Child Care Benefit on top of the usual annual CPI indexation.

Looking forward an easing in underlying inflation is expected as demand pressures ease and growth in unit labour costs slows as productivity strengthens. The current surge in investment is delivering increased capacity, now starting to show in strong output and productivity growth.

The Government’s sound economic management has ensured that the Australian economy has the flexibility to adjust to substantial price fluctuations. Decentralised industrial relations is preventing an outbreak of unsustainable wage demands as has happened in previous times of large rises in the terms of trade. Australian households are benefiting from the higher standard of living that comes with solid economic growth, sustainable wage growth, near record labour force participation and the lowest unemployment rates in 33 years.

6 comments:

LuckyPhil said...

Stepen Long on ABC Radio reckons given Glen Stephen's previous comments, to not raise the rate would be seen as politically motivated.

Anonymous said...

It never ceases to amaze me how Costello and Howard get away with saying black is white. But it keeps working.

Did any of the Canberra hacks point out to him that the household debt servicing ratio has never been higher?

Lord Sedgwick said...

"The CPI we had to have."

"I love the smell of nails being hammered into a coffin in the mourning. (sic)"

ShowsOn said...

I don't know much about economics, so forgive me if this is a silly question, but here goes.

There are some people saying this inflation figure could result in two interest rate rises, one on November 7th, and another in December.

If that is the case, why doesn't the R.B.A. increase the interest rate by 0.50 in November, rather than 0.25, rather than two lots of 0.25 in November and December?

Is it because if they raise it by 0.25 in both months it won't look like they were intervening politically? i.e. they increase the rate both during and after the campaign, irrespective of who forms the next government?

phil said...

Costello may understand poltiics but he clearly doesn't understand his portfolio. Mind you, few Federal Treasurers do.

derrida derider said...

A good question, Howson. The RBA may well in fact raise it by 0.5% in November - if they don't it will be out of sheer conservatism (that's small-c conservatism, not political conservatism) and a desire not to look as if they're panicking.

Certainly some of those earlier interest rate raises should have been a bit more courageous - 0.5% is hardly a massive hike in the scheme of things, and it would have meant they wouldn't be being pressured to show their courage now.

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