Bruce Baird (Cook, Liberal Party) Share this | Link to this | Hansard source

On behalf of the House of Representatives Standing Committee on Economics, Finance and Public Administration, I present the committee’s report entitled Review of the Reserve Bank of Australia and Payments System Board annual reports 2005 (first report), together with the minutes of proceedings.

Ordered that the report be made a parliamentary paper.

Two areas of economic importance to almost all Australians are monetary policy and the payments system. The Reserve Bank of Australia plays a central role in both of these areas—for monetary policy, through the Reserve Bank Board, and for the payments system, through the Payments System Board. The payments system, in particular, has been an area of contention in recent times. The RBA has pursued what some have termed an ‘aggressive reform agenda’, with the consequences of those reforms being the subject of considerable debate. Conversely, monetary policy has been relatively stable when compared with some of the more turbulent periods in Australia’s history. Notwithstanding this, the RBA has lifted the cash rate by 25 basis points three times in the past 18 months, which, in combination with record petrol prices, has caused some level of community concern.

The committee’s February 2006 public hearing with the RBA was the third for the 41st parliament. Once again, the committee had the opportunity to discuss some of the key monetary policy issues in this important public forum. Overall, the RBA reported that the Australian economy, which is now in its fifteenth consecutive year of growth, is in a strong position. The RBA attributed Australia’s continued growth to well-above-average growth in the world economy and the emergence of China as an economic superpower.

While describing Australia’s economic growth as ‘impressive’, the RBA did raise some potential issues. In particular, it noted a ‘large’ current account deficit despite favourable export prices and terms of trade, increasing levels of household debt, and capacity constraints—all of which are recurring themes from the hearings in 2005.

In terms of interest rates, the RBA noted a number of factors which could put upward pressure on inflation: a high level of capacity utilisation, the tight labour market and large increases in the cost of some raw materials. In May and August, interest rates were raised by 25 basis points in response to the realisation of some of these inflationary pressures.

Unlike previous RBA inquiries, this inquiry also included an extensive investigation of the payments system. This investigation had a particular focus on the RBA’s recent and proposed reforms. The committee found that there are a wide range of views on these reforms, as has been evident in the media over the past five years or so. The most contentious of these issues is undoubtedly the reduction of credit card interchange fees. On the one hand, the RBA argues that its reduction of these fees will result in cardholders facing truer price signals when using their cards, while also saving merchants—and, ultimately, consumers—millions of dollars each year. Conversely, the two largest card schemes, Visa and MasterCard, amongst others, argue that there is no evidence of savings being passed through to consumers. They also argue that their competitors, the three-party schemes American Express and Diners Club, have been unfairly advantaged by the reforms.

The committee is not wholly convinced by either perspective with respect to credit card interchange fees. While there is no empirical evidence that savings have reached consumers, equally there is no evidence they have not. However, in competitive markets it seems illogical to suggest that lower costs for merchants do not result in lower prices for consumers. The committee therefore concluded that the benefits of the reform, at this point, outweigh any alleged disadvantages.

Some other reform areas which the committee investigated included the lowering of EFTPOS and scheme debit interchange fees, the removal of the ‘honour all cards’ rule, and the removal of the ‘no surcharge’ rule. Generally speaking, the committee found the RBA’s rationale for these reforms reasonably sound.

One area of concern for the committee is Australia’s evident shortfall in payments system technology. While we were once considered to be a world leader in this area, there was consensus during the hearings that we have now fallen behind. To remedy this concern, the committee recommends that those involved in the industry implement, or consider implementing in one case, a number of innovations, namely—PIN authorisations for credit cards, online functionalities for EFTPOS cards and chip technology for all cards.

I would like to thank all those who participated in this inquiry. The Governor of the RBA, Mr Ian Macfarlane, and his staff were always forthright and helpful throughout this inquiry process. Finally, I would like to inform the House that the committee’s next meeting with the RBA will be held in Sydney this Friday, 18 August. The committee is obviously keen to probe the RBA on the latest rate rise and on the probability of future rate rises. This hearing will also mark the last appearance before the committee of the current governor, Mr Ian Macfarlane. It promises to be a fascinating hearing. I commend the report to the House.

Craig Emerson (Rankin, Australian Labor Party) Share this | Link to this | Hansard source

At the outset, I would like to acknowledge the contribution of the member for Cook as chair of the various hearings of the inquiry by the House of Representatives Standing Committee on Economics, Finance and Public Administration. In relation to the payments system he was able to elicit a lot of valuable information but, more importantly, to sift through that information with other colleagues on both sides of the parliament and come up with a report that I believe contains a reasonable level of insight.

Let me explain that observation. We were bombarded with arguments in relation to the payments system from both sides. I expressed then, and I reiterate now, my disappointment that so many of the witnesses who came to the inquiry spoke very much from the point of view of vested interest. There did seem to be a scarcity of independent analysis of the payments system and of the reforms of the payments system that had been implemented by the Reserve Bank.

It was proposed by some—indeed, many—that another authority should review the Reserve Bank’s reforms of the payments system because they felt that the Reserve Bank had not done a good job overall. The committee considered that it had done a reasonable job and that there was not a case for an independent review of that work.

To keep the whole matter in perspective, the estimate of the total available reduction in cost to consumers was $580 million, which works out at $29 per annum for every Australian, or 56c a week. So we were not talking about big beer for Australian consumers, but it was big beer for a number of the players in this arena. We were not convinced by arguments that none of that money was passed on to consumers, nor were we convinced that all of it was passed on to consumers. But, as the chairman has pointed out, it is likely in a competitive market that at least most of it would have been passed on to consumers.

The second part of my contribution today deals with the interviews that we conducted with the Governor of the Reserve Bank in February. They are to be resumed next Friday and I am sure that will be a fascinating meeting.

The report that we are debating today contains evidence from the governor given at the hearings on 17 February where he said:

... based on the considerations I have outlined here today, it is more likely that the next move in interest rates would be up rather than down.

That was indeed prophetic, because the next movement was up. That was in May. Subsequently there has been another movement—again, up—in August, and the financial markets are factoring in a 90-odd per cent probability of a further increase in interest rates within the next few months.

So, already we have had three interest rate rises since the last election when the Prime Minister had promised to keep interest rates at record lows, and a very high probability of a fourth. I put on the record today that there is a realistic possibility of a fifth interest rate rise since that commitment was given by the Prime Minister.

It is worth asking how we got to this point. A lot of evidence has been provided by the Reserve Bank, not only at those hearings but, more recently, in the statement on monetary policy. Acute skill shortages have been building up over a very long period of time. A 15-year economic expansion inevitably will result in domestic demand hitting up against capacity constraints. The government should have had a lot more foresight in seeing this coming.

I would argue that the basis of that 15-year expansion was firmly founded in the economic reform program initiated by the previous Labor government and carried forward in some places by the coalition. But this government should have anticipated that problem. It failed to do so and that is why the interest rate chickens are coming home to roost. Instead of building the nation, the government has built its electoral stocks by spending up big in election years with no plan for the country’s future. So it will be a fascinating hearing on Friday, when we will be talking to the governor at his last appearance. I again thank the chair of our committee for the work that he has done on the payments system and more generally.

Phillip Barresi (Deakin, Liberal Party) Share this | Link to this | Hansard source

Does the member for Cook wish to move a motion in connection with the report to enable it to be debated on a future occasion?

Ian Causley (Page, Deputy-Speaker) Share this | Link to this | Hansard source

I move:

That the House take note of the report.

In accordance with standing order 39(c), the debate is adjourned. The resumption of the debate will be made an order for a later hour this day.