Transcript of Question & Answer Session Lumps, Bumps and Waves

Thank you, Luci. Luci has kindly agreed to take some questions. So any questions from the floor, please put up your hand, but please wait for a microphone. So while you're thinking about your questions … You've got one. Jamie. There you go after you.

Thank you. Thank you, Luci. Perhaps a wave globally is the low interest rates that are everywhere in our major economies around the world, and I don't know about wage growth around the world, but I suspect that's quite low as well. And CPI in many, many countries around the world is also low. What's the problem with all three of them being low at the same time?

Thanks. That's a very good question. It's not really quite the case that wages growth and CPI growth are low right around the world. There are a number of advanced economies where unemployment has gotten low enough to start pushing wages growth up. It was a lower level of unemployment to get there than a lot of people expected but once you get there, it happens. Wages growth has picked up right around the industrialised world, more or less other than Australia. And in a subset of those countries, we have also seen a bit of a pickup in inflation, maybe not a big one, but inflation has been at two and is quite close to two in the US. Some of the Scandinavian economies, the UK, a number of other advanced economies, actually, inflation's more or less at target and where it's been lower than people would have wished has been mainly Europe and Japan, more so than say the US. It's been lower and they've been responding to downside risks, and that's why you've seen some recent easing in monetary policy stance in some of those economies, but it's not a universal that wages growth has been weak and inflation has been weak.

But it is a universal that the global interest rate has come down, and the Governor has talked about this publicly a number of times recently. I mean, it is kind of hard to grapple with, but it just seems that for a variety of perhaps demographic reasons, the supply of savings in the world is very high relative to the appetite to invest. And there could be a number of different moving parts driving that result, but the reality is if you've got a lot of savings, looking for an investment home, the price of those savings, the return you get on them goes down and that's a global phenomenon as the Governor has talked about.

As an independent central bank in a country that has a floating exchange rate, we do have a fair bit of autonomy to move around the global trend in a cyclical way, but we can't fully resist that global trend. We have to take the world as we find it.

Is it a bad thing? I think one of the issues is if … I mean, it is kind of weird to have interest rates at zero and people not invest. So I think the underlying problem is the lack of appetite to invest and the willingness to take very low returns and not be compensated for risk. So there's a number of things that are a concern about that, but I think fundamentally the issue is that even with rates where they are and the cost of capital as low as it is, people just don't seem to be particularly inclined to invest enough to absorb the savings that people would like to save.

Hi, so I just want to thank our group for coming to Geelong and yourself coming today. It's really exciting to have people here talking about macro issues. So I was very interested to see the population growth here in Geelong on your graph. My question is more about this question around consumption and retained savings or high rates of savings and how the decisions are made by the RBA and others around certain factors that are sort of almost set in terms of decision making. My question is where in an environment where waste management is a huge issue, where people are really engaged around the circular economy and what are we going to do to be a more sustainable world in effect, yet at the same time we're telling people we need to buy more and we need to spend more. So I know it's a bigger question than probably just the RBA, but I'm always intrigued at an interest rates discussion being hinged on the idea that we need to consume more and spend more to actually have a vibrant economy when I think we need to reset the paradigm.

I hear what you're saying and it is a very good question. And I think fundamentally, the issue is we need more income, we need more jobs, we need more employment. I mean, employment is growing very quickly, but so is the supply of labour. And so we have spare capacity in the labour market, and in order to get people in jobs, we need more growth.

Now, there are several different ways you can spend to create those jobs, but in the end, a lot of that will be consumption. Some of it will be investment and so I think there has actually been quite strong, up until very recently, quite strong growth in dwelling investment despite the recent falls, dwelling investment is at a high level. A lot of people like to think of dwellings as not being productive, but they do provide housing services. People live in them. And so that's something to think about.

But yeah, I mean in some sense reducing waste is about increasing productivity. You get more for what you put in because you don't have as much waste. And so I don't think any economist is going to argue with having higher productivity, but you're right. I mean, fundamentally the issue is, well, if people don't spend money, how else are we going to get people in jobs? And that's really fundamentally the issue. Thank you very much for the question.

Thank you very much for that presentation. Just getting back to the reduction interest rates this week, and obviously that's very pertinent, it's going to have an effect on the housing market and previously the Governor has made comment about his concerns there. Does the Bank think that it'll make a difference with the investment profile and investment activity of businesses as well? Because a quarter percent, when it's down as low as it is, it doesn't seem to make that much difference and yet it might do the opposite and really encourage the housing market, which is of some concern. So how does the Bank weigh those two or three issues up in making the decision?

Thanks for the question. Yes, the Board absolutely does weigh up those issues. To answer the substantive question, actually, historically both in Australia and in every other country, it's actually really hard to find a direct effect of interest rates on business investment. If interest rates being lowered boosts spending, boosts growth, increases jobs, that creates a better demand environment that will subsequently encourage investment. But the direct effect of interest rates on business investment is basically not evident in the data, no matter how much you torture it with econometric techniques.

So really, I mean the housing market is very interest sensitive, that's a known factor. Dwelling investment is quite interest incentive, although there are reasons to think that maybe it might take a bit longer to come through or be not as strong a response this time around, and we've allowed for that. But we do still think, in essence, the transmission of monetary policy doesn't rely on business investment being one of the first stage responses, but you still do get channels of transmission via the exchange rate, via consumer spending decisions by the fact that indebted households now have more dollars in their pocket, which they can choose to spend or reduce their debt and feel better about their balance sheets and all of those channels of transmission are still in operation. Thanks.

In some remarks on Tuesday night, and I think I heard him correctly, you've got to correct me if I'm wrong, but the Governor, Phil Lowe said that the average household has 16 months of housing repayments in the bank in terms of offset accounts and other means of savings, which tells me that we've gone in a fairly short period from a nation, and this has been a theme of the questions, a nation of spenders to a nation of savers, for a whole range of factors. In your mind and the Bank's mind, what are the magic ingredients for the recipe to get households to invest again? And if you make that assumption around households, you have to make a similar assumption around business having more cash. What are the magic ingredients to get business and households to invest?

Well, thanks for that question. Just to clarify, it's about two and a half years of accumulated buffer in offset and redraw accounts of people who have mortgages. Obviously, that doesn't apply to people who don't have mortgages. It's only the ones who do. And a reasonable fraction of people have quite new mortgages and have very small buffers so it's not evenly distributed, but that's not really a new phenomenon. It's been growing for quite some time. And fundamentally, one of the things that is going on is that households are responding to incentives. We have variable rate interest mortgages in this country, we have an incentive, because owner-occupied debt is not tax deductible, to pay down your debt quickly. And doing that in an offset account or redraw facility is a very tax effective way of precautionary saving. And you can still draw it back if you need to. So rather than just having a lower mortgage, having a big redraw facility just means if something bad does happen to you, so it actually imparts a great deal of resilience.

So I wouldn't say it's a change in saving behaviour. The household saving ratio is not particularly high at the moment. It's more about the tax and other incentives in the Australian system that have incentivized the building up of buffers. And with my old hat of financial stability on, I would say that that is just a really good outcome.

In terms of getting things moving and getting people spending again, as we've talked about recently, it's fundamentally an income problem. Wages growth has been very constrained for a while. It's just really hard to have inflation at 2.5%, which is the middle of our target band, if you've got wages growth at more like 2. If you think that there's positive productivity growth and on average, one-plus is sort of the average rate of productivity growth over a long period. So those things don't add up. So it's just very hard to sort of avoid having low inflation when wages minus productivity is as low as it is.

So fundamentally this is an income problem. And as I mentioned, a large part of that is about wages growth. Another part of it, which we've identified publicly in the past, is that actually the deductions from household income through tax have been growing quite quickly. In calendar 2018 gross household income, as reported in the national accounts, increased by about 3.5%, but the tax take increased by 10%. And it can't be bracket creep because people weren't creeping up brackets that much. So yeah, there's been a real increase in compliance with tax law and, as a consequence, there's the tax density of household income has really increased. So one thing we need to see is stronger growth in gross income, more employment, more people in jobs, stronger wages growth. And the other thing is to avoid taking that kind of rate out of the growth of income that does occur.

Luci, thank you very much. Could you please join me in thanking Luci Ellis.