TREASURER:
Today's Consumer Price Index showed an increase in prices of 0.6 per cent in the September quarter and 2.6 per cent over the year, confirming that Australia's inflation rate remains low and within the band of 2 to 3 per cent which has been fixed by the Government by agreement with the Reserve Bank of Australia.
Those factors which contributed to higher prices in the September quarter, included petrol prices as a result of higher world crude oil, housing costs because of strong and ongoing activity in the construction sector. Now those items that actually decreased in prices in the September quarter included vegetables, audio visual and computing equipment, pharmaceuticals and holiday travel and accommodation.
Overall, however, an outcome of 0.6 per cent for the quarter and 2.6 per cent for the year is an outcome which shows that low inflation continues in Australia. There are no signs of price pressures, and in fact we believe that consumer prices will decline over the course of this financial year.
Australia is now in the situation where our unemployment rate is below 6 per cent and our inflation rate is below 3 per cent. The last time we were in territory like this was in 1968, thirty five years ago. So it is confirming an economy with good jobs growth, without price pressures and an inflation rate which is very much within the band that the Government has set and indeed, looking through the course of the year, if anything, we would expect price pressures to moderate and perhaps even come off a little.
JOURNALIST:
Why do you say that so confidently that price pressures are not going to (inaudible) prices are (inaudible) falling?
TREASURER:
Well, we forecast, in fact, a lower CPI through the year to 30 June next year. We don't see any price pressures in the domestic economy. In this particular quarter, as you would know, there has been an appreciation in relation to the exchange rate so that will have an effect on some of the prices of imports. But if we can keep wage pressures moderate, if we can keep our economy growing solidly, which I believe it is, then inflation will remain moderate and I don't see it accelerating from this point at all.
JOURNALIST:
Do you see the higher dollar playing a role in prices coming down?
TREASURER:
Well, the exchange rate, obviously, is going to reduce the prices of imported items and that will help to keep inflation low. I think most Australians would think that as the Australian dollar appreciates, that they would see that as a good thing, and it is a good thing in the sense that it brings imported prices down. Overall, however, the fact that the Australian dollar has appreciated so much makes it harder for our exporters. And overall, because it makes it harder for our exporters, that is probably a negative effect on economic growth. It is counter-intuitive for many Australians, who, I think look at a strong exchange rate and say that is a good thing. And it is a good thing if you are buying imported items or if you want to have an overseas holiday. But overall, it makes things more difficult for our exporters. And overall, that detracts from growth. So, the stronger exchange rate overall will be detracting from growth and it will make it just that little bit harder for Australian exporters.
JOURNALIST:
Will it make it also a more difficult balancing act for the Reserve Bank?
TREASURER:
Well, overall a stronger exchange rate would detract from growth. Now, Australian growth will still be solid. It will be, we are forecasting above 3 per cent, by world terms, one of the strongest performers. I am, how you draw that into your equation on monetary policy is a matter for you.
JOURNALIST:
How concerned are you though, about the dollar appreciating?
TREASURER:
Well, look, I said at the time, when the Australian dollar against the US dollar was below 50 cents, I said that that was not a fundamental of the Australian dollar. I said it was caused by the rise and the rise of the US dollar. And I made the point over and over and over again that the US dollar would correct itself. If you go back to that period, all sorts of experts had all sorts of theories. But that period was the rise of the US dollar. And we had all that talk about new economy, old economy and all that. I remember making the point at the time that it would correct. And it has corrected. But, the Australian dollar has risen against the US dollar this year by 25 per cent. That is an extraordinary rise. Now, a large part of that of course is the correction in the US dollar, as we always expected. But that rise of 25 per cent has made things tougher for our exporters. We should acknowledge that and because it has made things tougher for our exporters, overall that will detract from growth. Our exporters - again it is counter-intuitive - our exporters were enormously helped when the Australian dollar was low. A lot of people, you know, would have said, what a terrible thing. Well it wasn't a terrible thing for our exporters. I will tell you that. And life has become more difficult for Australia's exporters and that will have an effect on our current account balance.
JOURNALIST:
Is it possible to quantify the effect on growth of, the dollar is now above 70 cents US, is it possible to quantify the effect on growth?
TREASURER:
No, I am not going to quantify it. I make this point, and I have just made it, that as the dollar rises our exporters find it tougher. As exporters find it tougher, your trade balance is greater. That detracts from growth. Our growth would be much higher than it currently is, if we didn't have that imbalance. And to some degree, that imbalance has been worsened by exchange rates. Now, I am not going to put a figure on it. I will be doing Mid Year Reviews in November, and that is the point at which I will update our forecast. But we are forecasting growth in the Australian economy above 3 per cent, that is a decent clip by world standards.
JOURNALIST:
So do you see the dollar staying at around those levels (inaudible) or do you think it is just part of general cycle (inaudible)?
TREASURER:
I am not going to forecast future movements in the dollar.
JOURNALIST:
(inaudible) this morning supported by reports of a free trade pact with China (inaudible)?
TREASURER:
I am not going to go into reasons behind currency movements but I will say this, that a trade and economic framework agreement with China would be very positive for Australia and the degree to which we can heighten our trading links represents a wonderful opportunity for our economic future. China is going to be the growth economy of the world and it is in our region. And more importantly, we have a lot of what China wants to import, particularly in the energy and minerals area. Now, developing that relationship with China will be an enormous benefit to Australia. And as China comes out of the regulated command economy, and becomes more and more a liberalised economy, it is going to grow better. And that will be a long term benefit for Australia, and it is in our part of the world and we have a natural complement with what they need in terms of their own trade.
JOURNALIST:
If there's no general threat to inflation, does it make an interest rate rise more desirable to (inaudible)?
TREASURER:
Well look, we have inflation targets. We have set an inflation target by agreement between me and the Governor of the Reserve Bank. That is at 2 to 3 per cent over the course of the cycle. Where are we today - 2.6 per cent. Bang in the middle, bang in the middle. And we don't see price pressures emerging in the near future. So, you would have to say that in terms of the inflation targets that we have got, today's outcome is very much on track.
JOURNALIST:
But does it make an interest rate rise more desirable?
TREASURER:
Well, I am not going to talk about future movements in interest rates.
JOURNALIST:
(inaudible) house prices are not part of the CPI is that right?
TREASURER:
Housing construction is. The construction cost of housing is part of it, but that's the way in which it gets in, which actually rose. But these CPI, Consumer Price Index, don't measure the housing market in terms of established real estate and land.
JOURNALIST:
(inaudible) read today that an interest rate rise could be as soon as Melbourne Cup Day?
TREASURER:
What paper did they read that in? The Age? Enough said. Thank you very much.