The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
Picture of Peter Costello

Peter Costello

Treasurer

11 March 1996 - 3 December 2007

Transcript No. 2001/006

THE HON PETER COSTELLO MP
Treasurer

Doorstop
Parliament House, Canberra

Wednesday, 7 February 2001
10.00am

SUBJECTS: INTEREST RATES

TREASURER:

Well, today the Reserve Bank has announced that it is cutting the official interest rate by 0.5 of a per cent to 5.75 per cent. The cut in interest rates, which has been announced by the Reserve Bank this morning, should be passed on by the banks with all haste to Australian home borrowers. What that would mean is that the standard variable interest rate, which is currently 8.05, would come down to 7.55 percent. That is half a per cent, which is a saving of $42 a month and $500 a year for the average Australian home buyer. Passing on todays interest rate cut is a saving of $42 a month and $500 a year to the average Australian home buyer, and thats going to put more money in the pockets of hard pressed families.

The decision to cut interest rates today was opened up by the very low CPI figure, which came out in January, a remarkably low figure at 0.3 percent. As I have consistently emphasised, low inflation means low interest rates, which is good for home buyers and good for consumers. The Government welcomes todays decision, its great news for home buyers. I call on the banks to pass on immediately the saving of $42 a month to the average Australian home buyer

JOURNALIST:

Treasurer is the down-side a weak economy?

TREASURER:

The Banks assessment today, of course, is that there is considerable resilience in the Australian economy and even in recent months you have seen retail trade stronger than expected, reversing the down-turns in November and December. You had a record sales in relation to passenger motor cars in January. We have always said that the extremely high growth in consumer demand through 1997, 1998, 1999 would come off. We have always said that, but a lot of Australias growth is now switching into exports.

This is good news for home buyers, 0.5 of a per cent off their mortgage, $42 a month, $500 a year and that will be good, actually for consumer demand, as well.

JOURNALIST:

Is this a rate cut that could save the Governments political bacon this year?

TREASURER:

It is a rate cut that will save home buyers, on the average Australian mortgage, $42 a month, $500 a year. When this Government came to office the standard variable mortgage interest rate was 10 per cent. After allowing for the cut today the standard variable mortgage interest rate is 7.55 per cent, which means that people are paying on the average Australian mortgage $3000 a year less, $250 a month less. Now, the only person I have seen out there complaining about the lowering of interest rates today is Mr Beazley. Hes complaining that interest rates are lowered and why wouldnt he complain, because when he was the Finance Minister the mortgage interest rate was 10 per cent and the average Australian family paid $250 more a month, $3000 more a year off after tax income.

JOURNALIST:

Treasurer, does it ease your conservative concerns you have expressed about the slowing US economy?

TREASURER:

No, the slowing US economy is not affected by Australian interest rates...

JOURNALIST:

...no, its impact on Australia

TREASURER:

...and what we do with Australian interest rates is not going to, obviously, affect what is happening in the US.

The US economy seems to have slowed quite considerably and more than people were expecting. That will have an effect on Australia. The US is the largest economy in the world and what happens in the US economy affects everybody in the world. Now, there was a little bit more positive news in relation to corporate profitability, I think, in the US. Its too early to say what will happen, other than we know that the US has turned down. That will make life a little bit tougher. I remember in 1997 and 1998, where every economy in this region went into recession, bar China; Japan, Korea, Malaysia, Indonesia, New Zealand, Hong Kong, Singapore, and the Australian economy was able to ride that out. This will be a challenge too, with the US economy turning down. But we have got to make sure that we strengthen the Australian economy so that it can ride it out.

JOURNALIST:

Treasurer, such a big cut, 50 basis points in one go, would seem to indicate that the Reserve is concerned about heading off a recession in Australia.

TREASURER:

No, the Reserve Bank is targeting inflation. As it says in its Statement, inflation in the December quarter was remarkably low. I dont think anybody expected that, for the quarter with the rising energy costs, with the transition to the new taxation system, with all of those things, that you would have a consumer price index as low 0.3 per cent. It was remarkably low. I said it at the time and once you had a consumer price index that was as low as that, that inflation was obviously allowing for the one-off factors, down at the bottom of our band, you had the opportunity to lower interest rates.

JOURNALIST:

The RBA says economic conditions have deteriorated noticeably. Do you think there is scope for a further easing of monetary policy?

TREASURER:

Well, you know lets not start thinking about our next meal until we have digested this one. It was, you know, only 40 minutes ago that interest rates were cut for all Australians...

JOURNALIST:

But home buyers have had to endure several interest rate increases and they are hungry for rate cuts.

TREASURER:

The mortgage interest rate, after allowing today, would be 7 1/2 per cent. Now leaving aside our management of the economy in 1998 and 1999, where for a period you had it lower, its the lowest, that was the lowest interest rate since deregulation. In fact lower than even when they were being regulated. Back in the 1980s, regulated interest rates, when they were actually being regulated, were up 11 or 12 per cent. I think, actually, the Board said in its statement today that the interest rate is at historic lows. Anyway youll find it in there. And its 7.55 per cent. I can remember the days when I bought my first house and the Labor Party was running Australia and it was 17 per cent.

JOURNALIST:

Treasurer, the underlying inflation rate, the banks estimated at 2 percent, is 25 basis points lower than the market. Surely, that must pave the way for further cuts this year?

TREASURER:

Well, as I said Im not going to talk about further interest rate cuts. The fact is that as of this morning, Wednesday morning, interest rates have been cut by 0.5 of a per cent. To get the benefit to home buyers and businesses, banks have to pass it on - they should pass it on immediately. If you are on the standard mortgage interest rate on an average mortgage for an Australian that is a $42 a month saving, and that will be good for home buyers. I think it will be good for business too.

JOURNALIST:

Treasurer, will this cut be sufficient to ensure that greater investments tick along at a rate which enables it, (inaudible), guarantees that unemployment will continue to fall over the next year?

TREASURER:

Well, low interest rates can only be maintained in an environment of low inflation. We have an environment of low inflation. That is good for consumers. Let me make this, Ive made this point before. It makes it harder for many businesses, business is finding it very hard to get price rises on their products at the moment. If you are in business you might like a price rise, if you are a consumer you dont like price rises. Its good for consumers. So keeping the inflation rate low means you can keep the interest rate low. That is also good for business on the investment side. And its good for business in terms of their overheads. Every business in Australia would have a borrowing, either an over-draft or a borrowing of some kind or another and as of today the cost of that borrowing becomes, should become, $500 a year cheaper.

JOURNALIST:

(inaudible)...the dollar will suffer because of this?

TREASURER:

The exchange rate, I think is, those people that are dealing in the exchange rate would have looked, I think, at the low inflation rate and most of them have already factored it into their thinking. I think that is what you will find.

If you look at the money markets, the money markets had basically anticipated that interest rate cuts off the back of low inflation. The money markets have actually lowered their interest rates, another reason why the banks should be able to pass this on quickly, incidentally, is that if you actually look at the money markets, this has been widely anticipated, and some of the financial institutions have actually foreshadowed on their fixed rates, this interest rate cut.

JOURNALIST:

Business confidence has been very low lately, will this provide a boost to business?

TREASURER:

I think it will be very good for business. The fact is that when interest rates come down that is good for business. Its also good for home borrowers and that puts more money in their pocket. When the Government came to office, mortgage interest rates were 10 per cent, you had to pay $250 a month more on the average mortgage, and that was after tax money. So if you were on the top marginal income tax rate you had earn $500 a month extra to service your mortgage. Now, you put that money back in the pockets of consumers, that is good for consumers.

JOURNALIST:

How can a slowing US economy and a slowing Australian exports be good for the Australian economy? Does it work out like that?

TREASURER:

No, I dont think a slowing US economy is good for the Australian economy...

JOURNALIST:

And that is going to slow export growth...

TREASURER:

...I would rather have a faster growing US economy.

When the US economy was growing really fast, I said this, and it was affecting our exchange rate and everything else, I said, the only thing worse than a booming US economy is a slowing US economy. So, both will create problems for you, but to answer your question, no, I would prefer a strongly growing US economy. Let me put that on the record. Can I do anything about it? No, unfortunately I dont run the US economy.

JOURNALIST:

Treasurer, what does the size of the rate cut today say about the strength of demand in the economy?

TREASURER:

Well, it will strengthen demand in the economy. We have been predicting for some time that demand would weaken off record levels in 1997, 1998 and 1999, we have been anticipating that, and you would want that. When demand was running as strongly as it was in 1997, 1998, 1999 we werent going to keep that up indefinitely. The good thing is though, we were expecting consumer demand to come off a bit, it has come off a bit, and the good thing is that we had the opportunity to take it up with exports.

ADVISOR:

Last question please.

TREASURER:

OK? Thank you.