Transcript of Question & Answer Session The World Economy and Australia

Governor Stevens thank you very much. We've got some time for some questions, there's a wide variety of people from different backgrounds in the audience so I encourage you to speak up. If you can just say your name and the organisation you're representing that would be great, there are some microphones around the room.

Jack Frankie, Point State Capital. Quick question on the jobs, how do you weigh a mining job versus a normal job in the economy? It seems to me that the mining jobs were very well compensated maybe 150,000 or 100,000 a job and a normal job in Australia is probably 40. I don't know the exact figure but let's call it 40,000, how do you weigh a job loss in the mining sector, resource sector, versus the regular economy?

It's more like 60 than 40 for the average but the point is a good point that many of the mining jobs are very well remunerated. You've picked a couple there I think that are probably near the top, but this is part of the adjustment we're making there's less income, and the transition we're making is that the growth now has to come from other parts of the economy, where average compensation is lower and probably average productivity is also lower to go with that, but that's just part of the cyclical adjustment that we have to make. And there's no point kind of complaining that the jobs we're creating now are paid less that may be true, but they're the jobs that we need to create.

Thank you very much Governor Stevens for the very interesting speech. I'm Julian Callow from Element Capital. And I would be interested if you could just talk a little bit further about how you see the role of the exchange rate in facilitating the rebalancing of the economy. I notice in your speech you said that the Australian dollar has declined and will likely fall yet further over time, but in terms of what you would actually like to see happen there in order to facilitate adjustment it would be very interesting to hear any further thoughts you have thank you.

Well it's hazardous to predict exchange rates really but I think the big picture is the exchange rate has always played a role to help the economy adjust to terms of trade shocks, that's been the case for a very long time, it still is. It's playing that role and we need it to play that role, if it doesn't then the adjustment for the economy is much more difficult and that's true in both directions. In the days when we had terms of trade shocks and the exchange rate couldn't adjust it was much more disruptive for the rest of the economy. So as I say it's playing that role I think it will continue to do so, the situation is complicated because of the way global interest rates are configured that's true, there's nothing we can do about that, nonetheless I suspect that as I said today, I suspect further adjustment lies ahead, conditional on one's view of course of how the terms of trade will unfold.

Hi Kieran [from Ducane Family Office]. I was wondering how concerned are you in regards to the already pre-existing high levels of debt that further monetary policy accommodation can adversely impact?

Well the position I've had for quite some time is yes that burden's in the households are considerably larger than they used to be. On all the evidence available at this point households are managing that debt quite well, the delinquency rates as you would call them here in the US are quite low, so there's no material evidence of distress there. So they're handling the debt well, which isn't to say that you that one would be comfortable with a big rise in the debt burden from here. I think were we to see that I would feel uncomfortable about that. And this is the tension to which I was alluding in the talk; where we've got very accommodative monetary policy. Part of how monetary policy works is it induces borrowing and we have a modest rate of credit growth right now, we want to do what we can to help the economy with the adjustment but we don't really want to try to buy just a short-run burst of growth at the cost of a much greater vulnerability in the future, that would not be a trade-off that will be wise to make in my opinion, so what we're trying to do is strike the right balance between the need to help the economy adjust, to help support demand but not get ourselves into too much trouble with future debt.

Glenda Korporal from The Australian Newspaper, you've been fairly frank in the past year or so about the exchange rate and it has come down a long way from about 95 to I think it's probably about 76 at the moment. How much further can it go, obviously it's affected by the terms of trade if you assume perhaps current levels of terms of trade are you saying that the Australian dollar has got further to fall? And then I suppose if the terms of trade become lower could it get into the 60s?

You're inviting me to pick a number Glenda which I have chanced my arm a couple of times in the past year and gotten away with it, I'm not sure I should try to keep repeating that trick. I suspect further adjustment lies ahead, it is conditional on how low you think terms of trade goes and obviously on all manner of other things that affect the currency, but I'll be a bit surprised actually if it doesn't go down some more yet.

Thank you.

Is that suitably enigmatic?

Hi Michael Purcell with Citi Group. Your speech seems to imply that there's diminishing benefits of cutting rates further, yet the RBA still has an easing bias and still signalled a willingness to cut rates further if needed. Could you please talk a little bit more about the benefits of lower interest rates and how much more room do you think you have to manoeuvre with it still being effective?

I think policy's still effective but we haven't reached a council of despair position where we think it's completely useless to lower rates, but I think it has to be put on the table that to the extent that part of the way it works is by saying to people please borrow against future income and spend today but they've already done that and future income's lower and debt's already high, you have to think that the potential of that channel's a bit more limited than it used to be, that's what we're saying. Some people would argue that that just means you should do more, I'm not sure that I'd agree with that but regardless of where you come out there it's part of the landscape, it doesn't mean policy has no effect, but it's one of the limitations that I think we have to accept.

There's a tendency for people to say well things are still not quite strong enough just keep cutting and I think you have to ask a few more questions than that and think about the channels through which it will be effective as you make your decisions, so we've put on the table the possibility that through that particular channel which isn't the only one, but it is one of the channels, the effect might be less than it used to be. The evidence, at this point, if you tried to test this econometrically you won't be able to tell, as usual with statistical tests by the time they can tell you it's way too late to kind of inform policy but my suspicion is that people are less inclined today to rush out and borrow more money and go and spend with a 25 point rate cut than they might once have been, and that's a feature of the landscape we have to accept. Warren.

Warren Hogan from ANZ Bank. Just on the monetary policy flexibility theme, you talked about some global risks out there and I thought you raised a really interesting point on the earnings yield issue, but for you and the Board at the Reserve Bank how important is the concept of for a lack of a better word ‘keeping your powder dry’, keeping some ammunition in reserve, just in case something goes horribly wrong in the broader global economy?

Well it's a difficult one, it's difficult to know what one should make of the idea because one argument that we sometimes hear though I don't think it gets a great deal of currency at the Board, but the idea well don't cut so that you can cut when something really bad happens, the problem with that argument is that if it's appropriate to reduce rates because that will help the economy you really should use that ammunition. There's no point waiting till it's not useful and then trying to use it, so I'm personally not that attracted that argument purely as well let's just not do anything in case we have to do something later, I think it's better to do what's appropriate at the time, the more difficult thing is to work out what's appropriate at any one time.

Just let the room hear your question would be great thank you.

Craig Chapman from Sidley. So I want to turn to your comments on growth. Can you give us a sense because obviously that seems to be the biggest issue particularly with China slowing down, what areas are you seeing or looking for growth in?

In China?

Well for I guess that would benefit Australia for example?

Well the growth picture that I spoke to from the IMF is pretty close to the one that we hold internally. We watch China as closely as anybody of course and that's a source of uncertainty inevitably. I still remain probably in the somewhat more optimistic camp than some because I don't think it will all crash in a heap but the truth is that the adjustment they're making in terms of the property sector, the financial excesses et cetera and the whole transition towards domestic-led growth and away from export-led growth this is a pretty big transition you know it's no trivial task. They're well equipped to make it but this is a big thing they're attempting so it's a work in progress and inevitably we can't be sure how that will turn out. For us I think a more dynamic US is important and that's not really because of the size of the trade relationship, there are a number of export markets bigger than the US in our trade, but I think the sense of optimism, animal spirit to use that term, that comes when American business feels good, feels a mood to expand, I think a lot of Australian business people get that connection, they're still very informed and connected about what happens here and that will help us independently of any trade link, so I think that's very important and hopefully that will continue. And then if the Europeans can manage the odd problem they have that would also be helpful but that's also a work in progress about as much as we can say there.

I think we've got time for a couple more one down the back.

Hello Governor Stevens, good afternoon my name is Trina Blair from Enlogic. Quick question about the Murray Review which was announced late last year, could you share your thoughts on that review and any areas that you're particularly focused on as a result of that review?

I suppose the first thing to say I thought the panel did a very good job, the review panel in grappling with the various issues and the first thing to say about their main findings is they found that there's not a huge amount wrong in the core of the system. The system did well through a pretty big test globally. That said they have a number of areas of further improvement that can be identified. I think they've put their finger on some of the quite important ones, some of those are in the retirement income space and that's not my field so I won't comment on them but I think it was appropriate that there'd be a focus in that area. In the banking system they are in favour of stronger capital standards, unquestionable strength and you can see why I think that the tendency is to go that way and these are the sorts of things that we will now have to grapple with, it's not a bad position to be in to have had a system that came through the crisis very well. I think the lowest rate of return in any of our major banks was 10 per cent return on shareholders' funds in the worst year, that's plus 10 not minus 100 or something like happened in some other places, they were able to raise capital in the heat of the crisis, so that's good. So we're coming from a position where things went well but how can they be stronger and how can we avoid any sense of complacency which I think is something we do need to be careful to do. So I think the inquiry is timely and its conclusions will repay careful thought and I'm giving a talk on that set of topics in the next week or two, so I'll have a bit more to say maybe then or maybe not I haven't read the draft yet. If I have something to say that will be when.

One more.

Vin Plant Family Office, it seems to me there's a lag problem between yourself and the banking regulator in Australia in that they partially contributed to the burst in the Sydney housing prices by allowing investor loans to skyrocket amongst the second tier banks before capping them at 10 per cent year on year. And secondly there is now evidence of a significant breakout of interest-only lending on mortgages amongst virtually all of the banks, what's your comment in terms of the misalignment that appears to have been emerging in comparison with what you're trying to do on the economy?

Oh look I don't think I'd agree there's been a misalignment; we talk to APRA all the time, the question of housing lending has been something we've been talking about for the past year or so. It was when investor lending got to about 10 per cent growth that was the point at which I felt we really should have a sort of a step here of a regulatory nature. There's bound to be some entities are growing more than 10, some will be less, that's a matter of their individual business models and choices and the risks associated with it which would be an issue for APRA at a micro level to have a watch over and I have no role in that myself but as an economy or a macroeconomic phenomenon it wasn't until investor credit growth got to the high single digits or around 10 that I personally felt there was a strong case now to actually have a regulatory step. After all we've got overall housing credit growth of seven or something like that, you can't really get on a soap box about that. Yes, you could go to an individual institution who might be at a much bigger number if you were APRA and say let's have a look at what you are doing, but the extent to which they do that one on one I don't really know I don't have visibility over and it's not my business, at an overall level you can't write home much about that pace of growth, but once we're at 10 for investors and they're half approvals in Sydney I felt yep something should not only be said and we stepped up our rhetoric which had been gradually increasing and we worked with APRA on some measures. They've had their eye on interest-only and some other features of lending standards for quite some time and have been engaged in conversation with the banks about that, so I think it's an appropriately measured step. As I said earlier credit conditions are not the only thing driving housing prices in Sydney, they're one thing but not the only thing. Obviously for example the same credit conditions are in place across the country but not all housing prices are doing what Sydney's doing so that tells you it's more than just credit conditions, nonetheless it is important to have appropriately calibrated steps in response to these trends and I think we've got that in place at present. If more is needed more will be done, whether more is needed yet isn't actually clear it's a bit soon to know what the effect of the measures already taken have been just yet.