swan blamed costello for high inflation

Australia's economy is strong but faces a serious inflation problem because of the policies of the former government, federal Treasurer Wayne Swan says.

Mr Swan claimed the coalition government, in particular former treasurer Peter Costello, had let inflation get out of control.

"Former Treasurer Costello has a selective assessment of the economy," he told Sky News.

"The economy is strong but there is an enormous inflation challenge out there, an inflation problem that Peter Costello has left us."

He said there is "no doubt that the former government let the inflation genie out of the bottle".

"We have had the highest underlying inflation in 16 years and this government is determined to deal with it," Mr Swan said.

Mr Swan said although Australia has benefited greatly from the mining boom, which has propelled the economy through tough times, the previous government ignored warnings about the inflation problem.

"We need a war on inflation and we need to get downward pressure on inflation and downward pressure on interest rates," he said.

However, home owners struggling with mortgage repayments are tipped to cop yet another interest rate rise when the Reserve Bank of Australia (RBA) holds its first board meeting of 2008 on Tuesday.

Most economists believe it is likely the RBA will push the cash rate to an 11-year high.

Seventeen out of the 19 economists surveyed by AAP expected the RBA to raise interest rates by a quarter of a percentage point from 6.75 per cent.

Mr Swan said he hoped that there would not be an interest rate hike, but that was up to the RBA to decide.

Mr Swan said while the US economy slows after the recent credit market meltdown, Australia may not feel the adverse effects once anticipated thanks to the role of developing nations.

"What will carry Australia through this is the strength of the developing world, and most particular the strength of Asia," he said.

"There is a view out there that a downturn in the US will not necessarily have the traditional impact it may have once had on the developing economies, in particular the Asian economies."

World economic growth is expected to slow in 2008, but still expected to remain solid at 4.75 per cent, said the International Monetary Fund last year.

Major emerging markets, like China and India, have taken over as leading contributors to global growth, it said.

Mr Swan said this is all good news for Australia.

"Australia will be affected but not necessarily be as dramatically as some people are implying," he said.

He added learning lessons from the US and Europe credit situations is critical, and he is planning to meet with regulators next week to discuss the international lessons and what it means for fiscal policy domestically.

"We are in a very good position to handle the fallout from the sub-prime crisis but we are not immune from it," he said.