Thursday, October 25, 2007

Denial: The Treasurer was at it again... this morning's interview with AM's Chis Uhlmann.

My favourite question: "Treasurer, the market will have already factored in a possible Rudd Labor Government and nothing has happened. There's been no stampede for the lifeboats."

Below :

CHRIS UHLMANN: Peter Costello, good morning.

PETER COSTELLO: Good morning, Chris.

CHRIS UHLMANN: Treasurer, why did you gloss over the rise in the underlying rate of inflation yesterday, when you know that that's the figure the Reserve Bank are watching?

PETER COSTELLO: Because, for most people, Chris, the important thing is whether they're facing price rises, and the news that we got yesterday was that for consumers, inflation is at 1.9 per cent, in fact it's the lowest in eight years.

The second point, of course, is that monetary policy is targeted at keeping consumer price inflation between two and three per cent, consumer price inflation. And in fact, it has been between two and three per cent over the course of this government.

Now, there are other statistical measures which you can use to inform yourself about prices, but what we are shooting for is to keep consumer price inflation between two and three per cent over the course of the cycle.

CHRIS UHLMANN: But you use those other statistical measures when they suit you, Treasurer. In July last year, when the headline rate of inflation hit four per cent, you chose to highlight the underlying rate. Why is that the right number one day, and the wrong number the next?

PETER COSTELLO: Well, as I said yesterday, you use the other statistical measures to inform, when you take out volatile items, and the other statistical measures showed that inflation was towards the upper level of the band, around three per cent.

CHRIS UHLMANN: Forcing the Reserve Bank to move?

PETER COSTELLO: Well, I don't think that's the right understanding of monetary policy. The monetary policy which I have set with the Reserve Bank governor is to keep consumer price inflation between two and three per cent over the course of the cycle.

Now, there will be times where it goes below it, in fact, consumer price inflation is below it now. There will be times when it goes above it. But the important thing is that over the course of a cycle, over the course of an economic cycle, that it averages at two to three per cent, which is what it's done, compared to the Labor Party average of 5.2 per cent, when the Labor Party was in government, where inflation was on average double what it is today.

CHRIS UHLMANN: If we look at what's happening now, and the people who really watch these things closely, the futures market now has an 83 per cent chance of a rate rise on November 7. Now surely, the people who hedge millions, in fact, billions, of dollars, know what they're on about?

PETER COSTELLO: Well, sure, they move their positions on a daily basis.

CHRIS UHLMANN: It jumped from 57 per cent to 83 per cent yesterday.

PETER COSTELLO: Yeah, they're trading on a daily basis. And they move their positions on a daily basis. They're taking positions, and they're trying to make money out of it, that's for them. But I'm managing a $1.1 trillion economy, and my objective is to get as many people in work, and to keep inflation low, and to make sure the Australian economy grows.

Now, let me make this point, Chris, I think it's a very important point, that we have inflation around two to three per cent on the lowest unemployment in 30 years. Now, we couldn't have maintained anything like this inflation rate when we didn't have the important economic reforms that have been put in place.

And, I make this point, if you turn your back on those economic reforms, with an unemployment rate which is now at 30 year lows, you will get, as you got in Australian economic history in the past, a blow out in inflation.

CHRIS UHLMANN: Treasurer, the market will have already factored in a possible Rudd Labor Government and nothing has happened. There's been no stampede for the lifeboats.

PETER COSTELLO: Oh, well, let me make the point, because I think every economist who's thought about it, and successive Reserve Bank governors have made this point, if you reverse industrial relations reform in this country, you will set off wage inflation, just as we had in the 1970s and the 1980s, and the 1990s, when the last time the Labor Party tried to cope with inflation, you recall, they said, we had to have a recession.

That's what Paul Keating said, we had to have a recession. That was their only way of controlling inflation. Now, industrial relations reforms have given us the capacity to have much stronger employment, and keep inflation between two and three per cent, and if you turn your back on that, Chris, you are turning your back on Australia's future economic prosperity.

CHRIS UHLMANN: Treasurer, could you survive an interest rate rise? Would that not be the final nail in the coffin of the Coalition?

PETER COSTELLO: Well, I make this point, that home mortgage interest rates at 8.3 per cent are, what, I think they were 10.5 per cent when I became Treasurer, so they're two per cent lower, and the unemployment rate had halved. Now, to think you could halve the unemployment…

CHRIS UHLMANN: More rate rises are on the way, Treasurer…

PETER COSTELLO: To think you could halve the unemployment rate, and still have interest rates lower than when unemployment was double what it is, shows you how far we've come in this economy.

CHRIS UHLMANN: Treasurer, the major banks are also telling anyone who cares to listen that they'll raise interest rates no matter what the Reserve does because of the credit squeeze now, in the United States.

PETER COSTELLO: Well, for those banks that borrow in the United States, their cost of funds has gone up, because the United States economy is in trouble, and this is going to take a lot of management, by the way. They say, because their costs of funds have gone up, they're entitled to charge borrowers more.

There may be a case for that, in relation to some business loans, where, let's say, if the costs of funds has gone up 10 or 15 basis points, that's about 0.1 per cent or 0.2 per cent. But there is no basis whatsoever for any of those banks to change their standard variable mortgage interest rates.

Those standard variable mortgage interest rates are flexibly funded out of their deposit book, and their deposit rates have not risen, and they have no grounds whatsoever to move those interest rates without any change, any changes coming out of the financial markets in the United States.

CHRIS UHLMANN: We'll leave it there, thank you.