Transcript of Question & Answer Session Challenges for Economic Policy

Matthew Johnson, UBS. Governor Stevens, thank you for your very interesting speech. My question is a little closer to home. On the 7th of March you told the House of Representatives that monetary policy was doing the things that could reasonably be expected of it. Since that time the Australian dollar has risen substantially, so is it still the case that monetary policy is doing all that can be reasonably be expected of it?

I think policy's doing the thing – that low interest rates are doing the sorts of things they normally do in most respects. I'd still maintain up to this point that we're doing what can reasonably be done but if there's more that can be reasonably be done at some point then obviously we'd do that, but I'm content right now.

Warren Bird, independent, semi-retired, enjoying life.

Good for you.

Let's suppose that the natural rate hasn't declined long term and that therefore over the next few years the Fed and eventually Europe will need to quote unquote ‘normalise’ interest rates. There's a lot of discussion in markets at the moment about how practically that can happen given all the assets on their balance sheet and that sort of thing. So could you just venture a few thoughts on that particular challenge to policy implementation when it is needed?

I very much hope that we see the beginning of that normalisation at least in the US case, you know, within the period that it's being talked about. I think they'll be first. The technical question of can you lift the interest rates while the cash is still in the system, at least in principle the answer to that is that you can, provided you've got the other tools to in a sense lock up enough of the liquidity. If you cast your mind back to – we doubled our balance sheet in post the crisis through into the early part of 2009, a lot more settlement funds went into the system, but the cash rate didn't go any lower than 3 per cent. So we were able to manage a positive interest rate, elevated levels of ESA balances by various devices to lock them up. And I think if you look at what the Fed's been talking about with the development of the various tools, without wanting to go into detail, it seems to me that's the kind of thing they have in mind. So technically it is feasible to do that, and I think from, as far as I can see, they've signalled reasonably clearly that the funds rate will, when the time is right, start to lift and that's likely to be while the balance sheet is still quite large, and I think technically that's feasible to do.

Governor thank you for your speech. Two points, or questions from today. Obviously as you said QE has been variously termed as unconventional monetary policy. From your speech today would – should we draw conclusions that unconventional monetary policy should be perhaps now seen as conventional monetary policy in such circumstances? And secondly, with your questioning around the return of animal spirits, to what degree do you think demographics may be playing perhaps a disproportional effect, particularly in the developed world, in terms of response to this crisis and the willingness for demand to pick up and hence to drive real investment and therefore back to some perhaps more normal levels of growth as you might call them?

Was the first part of the question should unconventional policies be conventional?

Should they be now seen as conventional?

Well I kind of hope not I guess in the sense that I'd still maintain the hope that we don't get into the positon of ever needing to use them. And I think it would be vastly preferable to get to eventually be back at the world where the central bank had a normal balance sheet and operated on the overnight rate. I think it will be a long time before we do get back to that though in some of the major jurisdictions. So however one labels it the larger balance sheets will be a feature of things for quite some time.

On demographics, I'm not sure I'd say it's exerting a disproportionate influence but I suspect over time it has been exerting a bigger influence than we had all thought about. I think when you – you contemplate how big these forces could turn out to be probably the world should have been paying a little more attention to those things for longer. And I think you're right to question whether in at least in some jurisdictions things like retirement age, benefits for the older people, health costs and so on, these are going to be very, very difficult problems to deal with from a public finance point of view, all the more reason that it's good to start early.

Rory Robertson, Westpac Treasury. Governor you mentioned Ben Bernanke, I've got a theory that the smartest thing that George W. Bush ever did was appoint Ben Bernanke to be Chairman of the Fed in advance of the global economic crisis. In the Australian context I've got a theory that one of the smartest things that Treasurer Costello ever did was appoint you to the Governorship of the Reserve Bank, seriously, before the darkest days of 2008 and 2009 when the Australian economy, the Australian institutions, the Australian markets were subjected to the most profound stress test they've ever – you know in decades. And we came through it with flying colours in part because of the performance of the Reserve Bank and the Treasury and other institutions. So I'm thinking now we've seen the announced removal of a well-performed Treasury Secretary, and sometimes in Canberra we – it looks a bit like a political circus. I'd like to say that I find great comfort in the fact that the Reserve Bank is there providing a steady hand. And so I don't have a question - - -

I don't have an answer either.

- - - but I do have a statement. I'm not the right person to do this, but it is the right audience. I'd like to congratulate you and thank you on behalf of this audience for your efforts and your team's efforts in those darkest days back in 2008, 2009 because I think at that point it mattered who was in charge and I'd just like to thank you for those efforts sir.

Thank you.

Governor it's Sue Lannin from the PM Program on ABC Radio. How much of an impact do you think geopolitics, particularly the crisis in Ukraine and the war in Gaza, is having on financial markets?

I think that remains to be seen. Right now I think and we've said this, and everyone here knows this, markets for the most part have been remarkably sanguine about a whole range of things lately. Volatility is exceptionally low, risks spreads are highly compressed. Markets it would appear in the actual pricing are giving pretty low weight to the possibility that something will go wrong, I think that's a feature right now. So – but as for Ukraine and Gaza and any number of other things, well I guess we have to watch this space.

Matt Sherwood, Perpetual Investments, Governor. Looking at the 2009 crisis it was problems in balance sheets in three sectors, the government, the household sector and the banking sector, and the key there was actually getting the balance sheets fixed in the right order. The US fixed first the bank balance sheets through equity injection, then the households through low interest rates and QE and now they're going to fix the government balance sheet through growth. When we look at the other side of the Atlantic, Europe's tried to fix the government balance sheet first through austerity. They don't really have a plan for fixing the households and the bank balance sheets other than through low interest rates. So would you think their policy process, in light of that, has made their situation more difficult to solve?

Well I'm not sure that you can generalise about European households, some of them have a lot of debt but some don't, so that's a bit different. And I think the most difficult problem that the Europeans faced was the kind of feedback loop between the bank balance sheets and the sovereign balance sheets, particularly the peripheral ones, and you know that's kind of an order of magnitude more difficult than the problems the US faced I think. Notwithstanding that the US faced very difficult problems.

So I guess I'm not inclined to give lectures about budgetary policy, even here, let alone to other countries. As I said in the talk though, I think the fact that many governments had really not been doing the things they should have been doing on the fiscal side for a long time and found themselves already carrying quite a bit of debt. Then suddenly you've got a deep downturn, you might have to fix up a bank, now you've got a potentially serious debt issue and then you have a confidence dynamic where people think this is unsustainable so the rate rises and then it is. Right now of course that's gone the other way, for some reason it's sustainable, the interest rates have come way down and so it is sustainable. So you can get these multiple equilibria which I think makes it very difficult to deal with. But long standing I think reluctance to address the fiscal issues in some countries in Europe, not all – you know Spain went into this with actually a fairly low debt-to-GDP ratio, by most standards, it ain't low anymore because the crisis was big enough to make the difference. So it's harder to generalise but I think there is this difficulty and it harks back to a question someone asked earlier, as you get demographics and aging and entitlements, it's very hard for the political process to kind of contain that and that's part of why I think some of the Europeans have ended up in a situation where the fiscal accounts are fragile.

Glenn, Paul Brendan from Citi. Just listening through your speech I think you mentioned at least three factors that could be behind the expected low returns. So just going through those there was population, demographics and I think the third one was animal spirits. So just thinking through that checklist if you like for Australia, we're probably doing pretty well on all three, even on animal spirits. Business confidence, for example, is pretty reasonable but consumer confidence I guess is missing. But my question is to what extent is there anything further – if Australia is doing reasonably well on those three criteria, is there anything materially further we can do in that regard, or is it more a function of us waiting for the world to sort of address those three criteria?

I guess I'd agree with mostly with the premise of the question that declining population, that's not a problem for us. As people would know I've been a little bit optimistic on the productivity side, we had a disappointing period but I think that has been improving, there's no doubt more we can do there – get the list as I've said before, get the Gary Banks list. Animal spirits, my sense is that in a lot of areas of business people are sitting around tables saying yeah somebody needs to do something and we're waiting for someone else to do it. And you know start the investment and think about growth for the future. But you know if we all wait for someone else to do it no one does it. So I guess my message is: over to you guys. I think you know we could have a little bit of confidence in ourselves in the long run and that might do us a power of good.

Jonathon Malles-Black from Rail Infrastructure. I think a number of us would be very pleased to see some of the policy initiatives coming out of Australia's leadership of the G20 process this year. Just with respect to our first speaker how do we make sure that we don't fall into the trap of Australia writing very good policies which aren't then implemented?

Fair question and you don't make it better by not starting with good policies, so we should do that and implementation of these things requires commitment of the necessary resources and the preparedness to do post-implementation reviews and amend course if things are not turning out as they should. And I think it's a fair point to say: more focus on implementation and maybe a little less focus on the sound bite announcement and then thinking that's it. That isn't it, that's the beginning and the implementation matters.

Can you do one more?

Sure.

The last question.

Jacob Greber.

Jacob Greber from the Financial Review. I think in your forecasts you tend when it comes to fiscal policy to build in what has actually passed Parliament when it comes to budgets. We've had a pretty tumultuous few weeks, a certain number of things haven't made it through. What's your assessment now about how contractionary this budget is perhaps in the short term and also obviously going out? And also to what extent that is playing on this problem with our animal spirits?

Well I never felt that the budget per say was especially contractionary in the short term and I've said that. It wasn't view-changing relative to what we had already been assuming and I think that was clear in the previous address I gave in Hobart. What's going to emerge from this process? Well I don't know any more than you, we can only wait to see.

As far as confidence goes one or two people have already referred to a decline in measures of consumer confidence and that's obviously true, it remains to be seen whether that recovers as it has on some other occasions where we've had budgets with tough messages. To my eye there hasn't really been any effect in indexes of business confidence since the budget. They, if anything, have probably gone up a little, so nothing much to speak of there.

The key question might ultimately be really whether the current processes can result in collective confidence in the country that we can actually grapple with difficult issues, long term issues, have a sensible conversation and come up with some solutions. If we can do that, that actually would be good for our confidence, if we can't, well obviously that won't help.