John Watson (Tasmania, Liberal Party) Share this | Link to this | Hansard source

I come to this adjournment debate disappointed at the very jaundiced and inaccurate remarks made about a great Australian and generous company, BHP Billiton, by the former union boss and now ALP Senator George Georges. But the main focus of my address tonight is really the decision of the Reserve Bank to raise interest rates by 25 basis points. In 2003 the Treasurer and the Governor of the Reserve Bank of Australia said:

Monetary policy is a key element of macroeconomic policy and its effective conduct is critical to Australia’s economic performance and prospects.

George Campbell (NSW, Australian Labor Party) Share this | Link to this | Hansard source

Mr President, I rise on a point of order. I want to indicate that I heard Senator Watson—I think—refer to me as Senator George Georges. I do not mind him calling me an ex-union boss. That is fine. I wear that with pride. George Georges is a very good friend of mine, so I do not even mind you accusing me of being George Georges—or he was a very good friend of mine. But I think, Senator Watson, if you are going to abuse someone you should at least get our names right.

John Watson (Tasmania, Liberal Party) Share this | Link to this | Hansard source

I do apologise for that error. It is Senator George Campbell who is a former union boss. As I was saying, given the impact of oil on the economy in 2006, I believe it is again time to re-examine how best to achieve this objective. The Reserve Bank Act 1959 gives the Reserve Bank board the power to determine the bank’s policy. The government recognises the independence of the bank and its responsibility for monetary policy matters and intends to respect the bank’s independence, as provided by statute. My issue tonight is the rise in the fixed weight of the CPI, which does not recognise changes in consumer buying patterns. The price rise has been driven almost completely by two items: petrol and bananas. I quote from the Australian Bureau of Statistics website:

The problem is that the CPI, as I mentioned, is a fixed weight index and does not take into account changes in consumer behaviour based on several sharp price changes. For example, it is my belief that people are—or will be at some time in the future—changing their driving patterns in response to the high price of fuel. For example, people will drive less on the weekend and use more public transport. People will buy more fuel-efficient cars or switch to gas or hybrid vehicles or some other alternative. However the index does not reflect this.

A local cabbie who operates a 24-hour taxi in my state recently reported that he made a saving of some $800 a month by switching to gas from petrol. It is even more obvious that people have not continued to buy bananas but have switched to alternatives. I am quite sure that very few people were willing to pay over $13 a kilo for bananas when far cheaper fruit alternatives existed. However, the CPI does not immediately take these issues into account. Worse still, apparently the Reserve Bank of Australia board does not take them into account either until, for example, the price of bananas falls. However, it is hard to see a significant fall in petrol prices occurring, given the state of the world.

Another issue is that inflation has not been spread generally throughout the country. The consumer price index increased by 1.2 per cent in Hobart and 1.8 per cent in Brisbane and Perth. While this disparity might not seem much, we are talking about a decision prompted by an extra one per cent in the growth of the CPI. I quote directly from the Reserve Bank charter:

... the Reserve Bank Board has power to determine the policy of the Bank in relation to any matter, other than its payments system policy, and to take such action as is necessary to ensure that effect is given by the Bank to the policy so determined.

It is the duty of the Reserve Bank Board, within the limits of its powers, to ensure that the monetary and banking policy of the Bank is directed to the greatest advantage of the people of Australia and that the powers of the Bank under this Act and any other Act ... are exercised in such a manner as, in the opinion of the ... Bank Board, will best contribute to:

(a) the stability of the currency of Australia;

(b) the maintenance of full employment in Australia; and

(c) the economic prosperity and welfare of the people of Australia.

You will notice that the economic prosperity and the welfare of the people of Australia are given equal weight with currency stability.

The board in its recent statement acknowledges that energy prices are going to be rising for a while. For this to be continually reflected in interest rate rises would, I believe, be unfortunate for Australia. All parties agree on the need for low inflation. Price stability is a crucial precondition for sustained growth in economic activity and employment. However, to achieve this objective could in the short term give rise to pain and social discord in order to obtain longer term objectives. Both of the spikes in the CPI were driven by undersupply, not overdemand. Raising rates will not overnight stop people spending money on fuel. Indeed they will reduce expenditure, but that will not be reflected in reduced fuel prices. More importantly it could break up families by leading to bank foreclosures on family homes.

One solution is investment in alternative fuels such as ethanol, hydrogen and natural gas, which would keep the money circulating in Australia and relieve pressure on the balance of payments. My concern is that with the present methodology of the RBA and the prospect of future oil price spikes, because of potential problems in the Middle East such as the possible closure of the Strait of Hormuz, or the temporary closure of an oil-processing plant in Alaska, we could well see interest rates rise, with unemployment and home loan defaults rising. This two to three per cent price inflation constraint is very much RBA theory, which is being actively looked at by other central banks.

However the US takes a different approach. The US reserve also has to take into account ‘the state of the US economy’. In the most recent testimony to congress, Mr Bernanke, the Chairman of the Board of Governors of the Federal Reserve System, referred to ‘our pursuit of maximum employment and price stability’. Compare this to Canada. The principal role of the Bank of Canada, as defined in the Bank of Canada Act is ‘to promote the economic and financial welfare of Canada’. Today, however, it has a more narrow and specific internal definition of that mandate: to keep the rate of inflation between one and three per cent. This objective has been criticised for hurting Canada’s working class, because companies tend to lay off workers when interest rates rise.

The Reserve Bank board meets on the first Tuesday of each month and the interest rate changes, if any, are announced the following day. The head of Treasury, Dr Ken Henry, sits on the board. It is therefore open for the government to instruct Dr Henry to put a particular position to the board and argue the case vigorously. With fixed weight CPI for price inflation I ask: where are the statistical numbers for the board’s guidance for their other responsibilities? Given the concerns within the community, I look forward to further parliamentary debate on this issue of the Reserve Bank.