Transcript of Question & Answer Session An Economic Update

Could we have the first question please?

Eventually, the markets are anticipating further unease in the coming year, and in fact in recent days markets have been anticipating and even pricing in 80% probability for a move next Tuesday. At the same time, since the Reserve Bank cut in June and July, capital city house prices have been rising, and rising quite smartly. Over the past two or three months, I think the annualised rate is about 10%. I was speaking to some people here today and I think … well, there was a report this week that New South Wales agricultural land prices have risen in the past year despite the drought, which is a bit unusual.

So my question is, is it realistic for markets to think there's an 80% probability of a move next week and if so, what should we think about house prices? Is it a problem that house prices are rising strongly again? Maybe the next 18 months they'll go to new highs. Is that a problem or is that just the transmission mechanisms per month through quality that drives a stronger economy than drives a stronger labour market?

Thank you. There are a few issues there. I'm not going to comment on the market's assessment of what we're going to do next month, but the market is forecasting cuts and further easing of monetary policy over the next year. I think that's a reasonable expectation. The timing will depend on our assessment of the data.

On the housing market, it's true that prices have risen for a few months in a row now. We've got to remember for 18 months in a row, prices fell in Sydney and Melbourne, and they came down 15% and they've just come up a couple of percent so I'm not particularly concerned about that.

There are a few factors at work, lower interest rates are obviously one. The removal of the uncertainty about the tax arrangements for investor housing is another and there's been some easing of the prudential requirements. It seems to me quite possible that we could have a period now of rising housing prices because construction activity is slowing and the population is still rising quite quickly as well.

So there are some underlying drivers of housing prices and from a monetary policy perspective, it's not an issue at the moment. It would become an issue if credit growth accelerated rapidly, but I see no signs of that at the moment. Many households are a bit reluctant to borrow. It's not surprising when their incomes aren't growing strongly and banks are still a bit reluctant to lend. So the demand for credit is fairly weak. The supply is fairly weak as well. So in the current environment, I'm not particularly concerned about a borrowing binge again. If that would emerge it would be an issue, but it's not on today's agenda.

Next question please.

All right, so two quick questions. First, as mentioned, 80% chance is what the financial markets are pricing for next Tuesday. I'm wondering how much of a bearing does financial market predictions have on the timing of your easing policy? Do you feel any pressure from the financial markets when it comes to that easing policy and do you feel any pressure from any other areas?

Just before you go on with your second question. I feel no pressure from the pricing and financial markets. What our Board does is do what we think is right for the country and we were looking at trends in inflation, the labour market, and output growth. They're the things we focus on, not what financial markets are saying. So I feel no pressure from financial markets or from any other quarter. We do what we think is right.

I suppose it may just be that some people are thinking you're less data-dependent now, and your decisions might be through other areas that's happening in the geo-political space and so forth, which the financial markets price in?

The data are always very important to our decisions, where we'll make an assessment of what's going on with the labour market and the likely growth in output and inflation. So, we'll have to make another assessment at our Board meeting and we rely on the constant flow of data and we don't feel pressure from anyone.

Okay, good. So the second question is in regards to what happened with the New York Federal Reserve last week. It was that issue where they had to intervene in the market. Some people have said that that was just a plumbing issue. What's your opinion on what happened there? And do you think that the RBA may ever have to intervene in the same way that they did?

I don't want to have a running commentary on US Federal Reserve monetary operations. But what they're finding is what we've experienced over the past couple of years, that the financial markets, and particularly the repo market, is very sensitive to fairly small shifts in supply and demand. Once upon a time, banks were happy to operate in these markets that are prepared to devote capital and resources to providing market-making activities.

But changes in financial regulation have made banks much less willing to do this and we've seen now repo rate move around quite a lot over time and in the US they're now experiencing the same dislocation, and they're having to respond to it. We've got a very flexible approach to our monetary operation, so we've been able to deal with it quite effectively and the Fed is now learning that the US has to have this flexibility as well. I don't think it has any broader implications.

Thanks, Governor. Do you mind if I just ask one quick one quick one before … You just mentioned the bonds, a remark you have been saying were quite remarkable. There's now about $15 trillion worth of negative-yielding bonds around the world. Do you think there could be a bit of a bond bubble?

I don't like the word bubble. But as I said in my remarks, the reason interest rates are so low is lots and lots of people around the world want to save and there aren't many businesses saying, "I'll take some of those savings and invest them in new productive capital." And the result of that is that savers are getting low returns.

Dr Lowe, thank you for coming to Armidale. A couple of very quick questions, you might give me some quick answers. I'm not from the Fin Review, by the way. I'm asking you a question as an ex-farmer. When you get together with the other central bankers around the world, like Draghi, Carney, Al, et cetera, you must be starting to discuss as a group the fact that there are no rates that are stimulating the world economy.

And of course, many of them have gone to quantitative easing. We've seen in Japan in the 1990s that that didn't work, and it's a moot point as to whether it's worked in America now because they couldn't complete their cycle of other interest rate rises. If you get to the point in Australia where you get your rates down to zero, would you consider quantitative easing? And secondly, where has inflation gone? Has it gone in with technology changes? Has it gone in the internet? Where has inflation gone to?

Well, there are a lot of elements to that question. The first one, when I get together with my colleagues from the other central banks, which I do at least every two months, or they go to Basel every two months where the central bank governors get together. And over recent times the issue we've been discussing more frequently than other issues is whether monetary policy is carrying too much of the burden globally?

And the answer the central banks come to, probably not surprising given who we are, is that we do feel there is too much burden being placed on monetary policy. What we would like to see is a stronger demand for the global pool of savings by businesses wanting to invest. This is why I talk so much about creating an environment where firms want to expand, invest, innovate and hire people, because that will be the solution that requires structural reform. I think there are policies that could be implemented there which would make a difference to create an environment where firms do want to expand, and that would take some of the weight off monetary policy.

You asked whether we would consider quantitative easing. The answer to that is yes if there are circumstances where we would. I think it's unlikely, and I certainly hope we don't have to do it, but it's possible and we've studied the mechanics, how we would do it. We've drawn on the experience of overseas. We've been involved in a lot of international groups that have looked at how it's worked. So we know how to do it and we've done something about under what conditions we would do it, but I think it's unlikely and I certainly hope that we don't have to go in that direction.

Where's the inflation gone? As I showed in one of those graphs, at the moment, rent inflation is the lowest in decades. That's to do with issues in the housing market. At the moment, the government is reducing the prices of the services it delivers to the community to relieve cost of living pressures, and utility price inflation has gone down as well.

More fundamentally, though, wage inflation is very low. It used to be the case in Australia that on average, people looked forward to wage increases of 3.5 or 4% a year. At the moment most people accept two. They're not happy about it, but they accept it. So there's been a ratcheting down of the wage norms and with wages only increasing at two, it's not surprising that inflation is a bit below 2%. So that's a fundamental factor, and then you've got these issues of rents and administrative prices on top of it.

Just before the next question, can I just ask a follow-on from that? You talked about the contribution that the infrastructure spending is making to the economy, in that gentle turn around, as you called it. Do you think, and I'm not sure how far down the Canberra Trail you wish to stray at any one time, but do you think that we're seeing sufficient infrastructure spending in the economy?

Well, that's a very political question. Let me give you the answer that I've given before. I think on the large mega projects in Sydney and Melbourne, I don't think at the moment there's very much capacity to do more mega projects. The construction costs are rising, there are capacity constraints. But where I do see the potential to do more is smaller projects, particularly in the areas of maintenance of road, rail, bridges, and in the regions and I sense there is capacity. People tell me this, that for the small and mid-size projects there is capacity and if we need to support the economy, then that might be one area to look.

So I accept the point on the big mega projects, there's not much more but smaller projects right across the country that use Australian contractors, employ workers, and create demand. I think that we should be looking at that.

Thank you. Next question.

Dr Lowe, welcome to Armidale. Dr Lowe, I have a bit of a left field question. In travelling around Australia, in particular the eastern seaboard and conducting business in drought affected areas, I would be interested in a view of where climate change sits with the Reserve Bank; not if it's happening but in framing the risk discussion. And you made mention of businesses lack of willingness to invest, and I'm wondering if you have a view, or the Reserve Bank has a view, in climate change in framing that risk appetite?

Well, it's increasingly clear that climate change is having an effect on the economy and on our financial institutions. We're seeing extreme weather events that are more costly, that's leading at the moment to an increase in the cost of some insurance. And in some areas, you can't get insurance, that's affecting investment decisions. We're seeing increased possibility of stranded assets in various industries and various locations.

And the repair cost for building infrastructure after extreme weather events is also higher. And that's having implications for government budgets and for insurers and other financial institutions. So it's a material issue. Climate change is obviously affecting investment decisions about power generation and how we do that and it's creating uncertainty for businesses and for individuals.

It's affecting agricultural production as we know in this part of the country, so the effects are wide ranging and financial institutions are having to deal with these risks -- insurers most directly, but asset managers as well. It's introducing potentially volatility into the macro economy as well. So it's a real issue and we're paying quite a lot of attention to what's going on. And there's nothing we can do about it, but we've got to understand the implications about the economy and financial markets and the Deputy Governor of the RBA has given a couple of speeches on this issue.

Thank you. Next question, please.

Dr Lowe, thank you very much for coming to our beautiful city. I've got a question similar to what was asked, from a different angle. As we near closer to zero interest rates, are we seeing a reduction in the effectiveness of monetary policy as a mechanism for stimulating economic growth or should we ask this [unclear 14:59], probably going to ask the same question, whether we should be having greater fiscal stimulus in the economy. I ask this with the observation that corporates are holding back on investment due to the [unclear 15:13] issues that we're facing. It seems to be [unclear 00:15:24] phase. We have an ageing population and with low interest rates seem to be holding onto their money rather than spending it as we would hope. And perhaps indeed, are propping up artificially the share market at the moment as well. And also, according to Royal Commission, banks seem to be more reluctant to issue credit. That's my question. Also, you talked a lot about wage growth being so important, given we have some of the highest wages in the world, why is that?

Well again, there are a few issues. Has monetary policy become ineffective? The answer to that is, no, but I do think it has become less effective at the margin. Once upon a time when we lowered interest rates, people would run off to the bank to borrow to either go on a holiday or get furniture or do some spending. They don't do that anymore. When we lower interest rates they're more likely to go to the bank and say, "Look, I want to pay off my mortgage, and I can do this more quickly now." So that has changed, but there are two mechanisms that still work as they always did. The first is the exchange rate. Just to think about the scenario where we hadn't lowered interest rates, where would the Australian dollar be?

It would be higher than where it is now and that would not be helpful for jobs or inflation. And the cashflow effect from lower interest rates still works. For every dollar of interest income received by the household sector, households pay more than two dollars of interest to the bank. So when interest rates come down, there's a net cashflow addition to the household sector. It's uneven, but there's a net addition, so that still works.

You asked about fiscal policy, I don't want to comment again on that tonight, but the point I want to emphasise is that we need to create this environment where firms want to invest and fiscal expansion might do that. But the real reason, the real way that you do that is through structural reform. It gives firms an incentive to invest, expand, innovate, and hire people. And for me, that's the priority both domestically and globally because interest rates are going to stay low for a long period of time unless firms want to use global savings to build new capital. That's the challenge we face and how do we best do that? And I think there are things that both government and business can do.

Next question, Mr Joyce, just one second, can I just ask a question. The geopolitical issue you talked about and the pessimistic outlook that that generally has. Do you think that's feeding more loudly into the outlook for business and their reluctance to invest? Is that sort of, do you have a way to measure that or is it a sense that that's a big contributing factor to reluctance?

What we see and I share it in the graphs, the measure of global policy uncertainty is extraordinarily high. And we also see in the surveys that businesses right around the world asking, "Do you intend to invest?" And they're saying no. And in the liaison that our central bank is doing and other central banks are doing and they ask businesses, "Why aren't you investing?" They say, "Well, it's all very uncertain. We don't know what the trade and technology landscape's going to look like. There's underlying uncertainty about technology as well. So we're just going to sit on our hands for a while," and it's been okay up until now because firms have hired workers.

They're not investing at the rate that they might've otherwise done, but they're prepared to hire workers. And one of the risks that the central bank community is worried about is firms might decide they don't want to hire workers either. So addressing the underlying factors that are leading to a lack of investment I think, is the fundamental challenge. We can move the monetary and fiscal levers, but unless we make firms want to invest, I think we're going to be in this world of low interest rates for a long, long time.

Next question. Someone who's no stranger to the audience the Member for New England, Mr Barnaby Joyce.

Well, thank you very much Mark, and I apologise for taking somebody else's [unclear 19:26] the opportunity. I'm just going to ask one question and it's pertinent to what's happening at the moment. We see that we are politically aligned with the US, we're economically tied to China, the two are in a trade war. What happens to us economically if we fall economically out of bed with the Chinese, in regards to our reliance on them, and what is the plan of the Reserve Bank if that was to occur?

I'm not sure what the exact scenario is, but if our economic relationship with China were to deteriorate and our exports to China were to decline, that would have a first order effect on the Australian economy. A lot of the prosperity that we currently enjoy is because we're able to sell our resources, that's minerals and agricultural resources, to China at high prices. It's been the story of Australia over the past decades. So what happens in the Chinese economy is incredibly important to Australia and our relationship with the US is very important as well.

In the event that our relationship with China were to deteriorate and we weren't able to sell our resources at the high prices, we'd obviously have to find other markets. We would probably find those markets, but the prices would be lower, our exchange rate would be lower. So the exchange rate is actually the great stabiliser of the Australian economy. If we couldn't sell our resources as we can sell them now, the exchange rate would come down and we'd all have to get used to lower living standards. That would be the core adjustment mechanism and the scenario you paint, we could ease monetary policy further, but there's not that much space there to do that, so I certainly hope that scenario doesn't come to pass.

Well, a couple more questions. Are there any more journalists who have questions? Right. Thank you. Of course.

Unfortunately, I am a journalist. I have a couple, maybe two questions here. The first one I wanted to ask was about unemployment. So our unemployment rate is currently fairly low, below 4%, and you suggest it might go lower. Is there a floor and what should, I guess, monetary and fiscal policy leaders do to lower [unclear 00:21:50]?

Is there a floor to the unemployment rate? The answer to that is surely, yes. But the floor is much lower than we used to think. I mean, you see in the US, they used to think the unemployment rate could go 5%, now it's three point something. And in Germany the unemployment rate is the lowest in 40 years, rates they didn't think they could achieve and the same in the UK. So I think the same can happen in Australia. We can have a lower unemployment rate than we've got now. Our best guess is 4.5% constitutes full employment. But hopefully when we get there we'll find the numbers even lower again. We haven't got a hard and fast view about what full employment constitutes, but it's certainly lower than where we are now. How do we get there? Part of our strategy is to have interest rates low for a long period of time and hopefully that will stimulate a strong labour market. We'd like to see the labour market tighten up.

Someone asked before, you seem to be implying there's a problem because wages in Australia are too high. I don't accept that. We have high wages here because we have relatively high productivity and we're a prosperous, wealthy country and workers should get paid well. I think over time we should go back to wage increases starting with a three. If we're going to deliver you an average inflation rate of two and a half percent, which is our mandate, and there's labour productivity growth of 1% a year and workers get their normal share of that, then wages should be increasing in steady state at 3.5%.

From where I sit, that's central bank Nirvana: wage growth 3.5 to 4%, reasonable productivity growth, full employment and inflation averaging 2.5%. That's what I'd like to see. Whether we are going to get there or not, I don't know but I think it's achievable. So I think if we can create a tighter labour market, that's the key and it's proving, as I said in my remarks, quite hard to create a tight labour market. We've done a very good job of creating a lot of labour demand. Employment is growing 2.5% for three years in a row. That's very strong, but every time there's more labour demand, there's more labour supply. I learned in first year economics at high school: it's the balance of supply and demand and they both are strong and you know it's good because more and more people have jobs. A higher share of the Australian population have a job today than ever before in our history. That's the good news but because labour supply is so flexible, wage growth isn't picking up.

I guess my other question has to do with the lumpiness of our employment sector and some communities in regional Australia. [unclear 00:24:35] unemployment to the point where there's [unclear 00:24:39] with that, but in other areas, smaller towns in [unclear 00:24:42]. Do you think policy makers should think, to turn their minds to how to make it more and even across Australia? And to ensure that, I guess, wage increase occurs everywhere or do you think that this problem will sort itself out?

You've moved beyond my area of expertise. The Reserve Bank mandate is a national mandate, so I look very much at the aggregate unemployment rate, but I'll observe, I think as you did, that the average unemployment rate outside the capital cities is pretty much the same as the average unemployment rate in the capital cities, but within the regional communities, you're right, there's huge dispersion. Monetary policy can't do anything about that. Should others? I don't know. I'll leave that to others.

I'm not actually obliged to ask this question but I feel like I must. In May when we were in Brisbane, you said that you wouldn't be surprised if the Bank cuts rates and in June you cut. This time next would you be surprised if you cut rates?

I genuinely didn't hear, but I probably didn't want to hear that question …

Can you pick the microphone up please?

Oh okay. Well in Brisbane in May you said people shouldn't be surprised if you cut rates, and in June you cut. This time next week will people be surprised if you cut rates?

I'm not going to answer that. You should expect us to act consistently with our mandate, and you should be surprised if we don't do that.

A more serious question here. You mentioned the potential structural issues, in terms of hiring moving a lot faster than GDP growth. Could you outline what you're sort of thinking there that, I mean what sort of factors might be at play there?

I don't really have any good answers because it's a bit of a mystery. As I said, employment growth, 2.5%, output growth, 1.5%. That's an unusual configuration because normally output grows more quickly than employment. At a simple accounting level it suggests that productivity growth in the economy has slowed down. If that were to be the issue. I think we've got a serious issue to confront for the country as a whole and we don't really have a good explanation for why productivity growth would've slowed down right at the moment. So it's possible there's measurement error, because these things are hard to measure. So if it continues though, we will have to face the challenge of weak productivity growth and do something about that. But I don't have a clear explanation at the moment.

Thank you. Can you just make sure you pick the microphone up and hold it a bit closer so that everyone can hear you please?

G'day I'm from O'Connor Catholic College. I have a quick question about what do you believe the effect of lower interest rates will have on the superannuation, especially for younger generations going into a long term future?

Well, by the time you retire, I'm hoping that businesses want to use the pool of global savings to invest in great capital and fund new innovation. If that's what happens, then asset prices will be higher and firms will be profitable and you can look forward to strong growth in your superannuation balances but in the short term, lower interest rates aren't going to do very much to superannuation. I think that they will push up asset prices a bit and that helps in the short run. But superannuation is about the long run. And the long run is about capital formation, development, innovation and building businesses. So people often look for monetary policy to solve the issue of the day, and sometimes it's the right thing to do, to look at monetary policy but there are deeper issues you've got to address. How do we make firms expand, innovate, hire people and invest? And interest rates in the end don't do that, do they? It's business dynamism. It's people like you, not me, who can get firms to do that and government can play a role as well.

You have studiously avoided mentioning the rather large level of corporate and government debt in the world and its effect on fiscal and monetary policy and the restrictions that that puts upon it and just wondered if you'd like to make a comment about that?

We're talking globally, not about Australia here. Public debt is very high globally and it's a significant issue because it means if there's a downturn, the capability to respond with fiscal policy is less than it would be if we had lower levels of public debt, and Australia provides a really good example of what can happen on the positive side if you've run responsible fiscal policy.

In the financial crisis, we had one of the larger fiscal expansions around the world. It's debated whether that was necessary or not, but we were able to do that and the Australian government was able to do that and support the economy because we'd run responsible fiscal policy for many years before. I think this is a consideration for the current government to get back to a budget balance to give us that flexibility in the future. Many other countries do not have that flexibility. We saw in the financial crisis that some of the worst affected countries actually had to tighten fiscal policy in the crisis. That's because of the high level of public debt and fortunately in Australia we are not in that situation.

Next question.

I wanted to ask a question about housing affordability, and you mentioned concerns, that rent increases have been there at the lowest for some time. How do you reconcile this with housing affordability? So if a positive outcome for the economy is increases in rent, how do you reconcile that with an ever diminishing affordability of housing rates?

If I suggested that slow growth in rents was a concern, I misspoke and it's an issue with inflation. The average inflation rates are too low from my perspective, and rents have a large weight in the CPI and rent inflation is very weak. So that's one factor holding down inflation. That was the context that I mentioned it. Weak growth in rents is actually making rental accommodation more affordable for many people, so from that perspective it's good, and hopefully if rent inflation is weak, people have a bit more income that they can spend elsewhere in the economy and that extra spending is good for demand and actually pushes up prices somewhere else. So thank you for giving me the opportunity to correct that. I think it's a positive development from housing affordability, but from a very micro perspective of getting inflation back to two and a half percent, it's a bit of an issue. But I think if people aren't spending on rent hopefully they're spending somewhere else in that economy and …

Can I just add something though, that another problem is that as an asset class is seen as an ever increasing need for it to increase in value all the time and that then increases pressure on rental returns for investors.

Yeah, you're right.

No answers for that one.

Well, any holder of an asset wants the asset to go up in value, don't they? That's why we hold assets partly to get capital appreciation. Over time, the rental yields have come down, the price has gone up by more than rents. But this is a global phenomenon, when interest rates are low right around the world for a long period of time, the risk adjusted rate of return on all assets has to be low as well.

Another way of saying that is the asset prices go up relative to the flow of dividends or rents from the asset. So that's one of the consequences of lower interest rates, risk adjusted rates of return on all assets become very low as well. We mightn't like it, but that's the way that it is, and you'll get sick of me saying this, the way to get around this is having an environment with firms wanting to expand, invest, innovate and hire people. The central banks can't solve this problem for you.

Thank you. We've got a question from a student. Just to make sure that microphone is right up close please.

In light of the increasingly negative effects of the drought for the rural region, does the central bank have any prospects to try to stimulate the sector, and how would they go about this and what would the likely effects be?

Well the short answer is no, we don't have any kind of tools to do it. I mean what the central bank does is print the banknotes, set the overnight interest rate and be responsible for financial stability and run the payment system. If we get those things right, it's good for the economy but it's not going to help with the drought. So there's nothing that the central bank itself can do. There are other arms of public policy that can do things that, unfortunately, we can't do anything for regional communities affected by the drought other than to run decent macroeconomic policy. I'd like to be able to do more for you, but I've got a mandate and my mandate is price stability, full employment and the economic prosperity of the total people of Australia. And the tools are the overnight interest rate, financial stability and operating the payment system. So we don't really have a mandate or the tools to do that, so I'm sorry.

Dr Lowe, thanks for coming to Armidale [unclear 35:26] this question, but, so currently Australian CEOs are averaging above $20 million in annual pay and you said household consumption is totally quite low because quite a [unclear 35:46] at the top end is they have a flow on effect to lower wage increases for the bottom line workers.

So I didn't … I think I heard the comment …

The CEOs in Australia are on quite high salaries … Does that limit the household spending for the average Australian worker?

So is the question, is that good, bad or what do I think about that?

Yeah, what do you think about that?

Well, as a regular Australian, it disturbs me. You've got some people who are paid extraordinarily high amounts of money and working Australians have relatively low wages and getting small wage increases. I think it's an issue for the society. The idea is that if you pay senior executives bonuses or high salaries, they'll actually work harder. I know I've got a flat salary and I say to my Board, look, don't even consider performance pay because I'm going to work as hard for you and for the people of Australia regardless of my pay. Actually, I think a lot of people are like that. If you're paid well, like I am, the pay isn't the thing that motivates you but it's actually doing a good job.

So that's my mindset. So I can't understand the mindset that says we have to pay you $5- or $10- or $20-million so that you deliver value for the company but that's the mindset that many investors have and, many people in the business community have. It's not a mindset that I share. You pay people well … I'm paid extraordinarily well and I do the job because I want to make a difference. Actually, I think many senior people in organisations have that mindset. So I'd like to see that mindset be more widespread, accepted in the community, and people saying, look, I don't need these mega salaries. I want to do the job because it's the right thing to do. I'm going to work hard. I don't need these big incentives. My incentive is to do a good job for the people I serve. So that's my lecture.

Well said. More questions? Nice and close with that microphone.

I'm a recent graduate from the great University of New England as well. And I don't think I'll ever get a chance to ask this sort of question to someone like you ever again, but I'm interested in the opportunity our region has for the Inland Rail.

The biggest drawbacks that I've come across so far is a low risk tolerance for business investment in the regions, but probably more of an effect which most of us will recognise here, is a lack of willingness for a lot of the national labour market to move out to the regions. I am under the view that regional Australia is actually much more innovative if you've learnt how to survive with a lot of other challenges that's not faced by larger centres or cities. More with your view, not so much the RBA will deliver is, have you, what would you suggest? How we can draw more people to move out to the regions or for more businesses to accept a higher risk tolerance to invest out our way?

I'm very reluctant to be drawn on this type of policy. It's not my area of expertise and they're really issues of government policy and the government doesn't advise me on my policy thankfully. I try not to advise the government on its policy. I would agree with you, the capacity for innovation in regional Australia is immense. Having grown up in Wagga Wagga, I see that as another prosperous town. It's doing well and the capacity is here as well. Perhaps, as you were speaking, it triggered one thing in my mind about risk aversion. We all know the world's uncertain, don't we, and there's a lot that we could talk about the various uncertainties and I talked about some of them today, but the uncertainty means that there are outcomes in the left part of the tale and outcomes in the right part of the tale.

The left part of the tale is bad and the right part is good and I feel too often as a society we're focusing on the left part of the distribution. We're been focusing on risk, the downsides, at the expense of forgetting about the other side of the distribution, the upside. So, we're spending huge amounts of resources as a society trying to deal with uncertainty on the downside and the possibility of bad outcomes. And if we focus too much on that, we'll lose the ability to seize the upside. And I think that's an issue, not just for regional Australia, but for the country as a whole. The risk appetite, I saw a survey published in the press yesterday saying Australians have become very risk averse and when you're risk averse, you focus on the downside of the distribution and not the upside. I think there's got to be some recalibration there.

That's where we are at the moment.

We're focusing too much on the possibility things could go wrong, it's all uncertain and we're forgetting about the tremendous possibilities our country has. As I said, our fundamentals are incredibly strong. We could have an incredibly bright future and we've got to focus on seizing that, not just on dealing with the downside. Now that's another lecture.

We've got some more questions and can I just mention Dr Lowe has being very generous with his question time. If you do have questions, could you please come to the microphone now? It'll be a long time, I suspect before a Reserve Bank of Australia Governor is back.

I'm trying to, I'll try and make it not so long.

Next question please, nice and close with that microphone.

I'm a student at O'Connor Catholic College and I was just wondering, would you say that the decrease household consumer spending is due to, in the Australian economy, is due to consumers instead deciding to spend their money overseas through e-commerce?

I think it's an effect, but it's very much a marginal effect; and the other thing is Australians have decided to go overseas in record numbers. We don't just spend on online commerce but we go on holidays overseas. There's an offset though because a lot of foreigners come and holiday in Australia. So I think that's pretty much a wash. The main reason consumption is weak is because income growth is weak. For a few years we could pass off wages and incomes rising at two or three per cent a year as something temporary, but we can't pass it off as temporary anymore. I think more of us have realised that our incomes are not going to grow, unless something changes, at the old rate and we've had to adjust our spending to that new reality.

Good evening Dr Lowe … Thank you for coming to Armidale. I've got two questions. One is around the payment system, this is probably a boring subject for most people here …

Not to me.

No, no. I'm interested in your perspective of the major banks and their coming on board with the new payments platform and your view of that over the last couple of years and how successful that's been and does it meet the RBA objectives in terms of innovation in the payment system. My second question is around your relationship with APRA and the counterintuitive sort of relationship in terms of credit squeeze and tightening in terms of the relationship with APRA in terms of money supply within the economy and also the aspects of the RBA in terms of we're looking to create more opportunities for growth and your relationship with Wayne Byres and how you work together?

Oh, I can answer that first. The relationship with APRA is excellent and Wayne and I work incredibly well together. Just last week I chaired the Council of Financial Regulators so we catch up regularly and we've got an outstanding relationship.

I talk to my colleagues in other central banks and they're often complaining about their relationship with their prudential supervisor. I never do that, and I always say look we've got a fantastic relationship between the central bank and the prudential regulator in Australia. So that's positive. Thanks for asking about payment innovations as well because this allows me to give a plug here because I hope you all have your pay IDs. No? Well if you haven't, then go and ask your bank for your pay ID; because if you get a pay ID then you can move money between any two bank accounts in the country in five seconds. Knowing just someone's mobile phone number, forget about BSB's and account numbers. If you have a pay ID then you can move money no matter who you bank with, between two bank accounts in five seconds just with your mobile phone number.

So everyone please go and ask their bank for a pay ID and use the new system, it's fantastic. People still complain about money and the time it takes to get money between banks but those days are behind us. And if it's taken you a long time then you're using old technology. So please use the new technology. The Reserve Bank has sponsored this system, and it's encouraged the banks to develop it. The large banks have been tardy and I've constantly called them out over it. Maybe the fact that everyone doesn't have a pay ID here is because the large banks haven't all been actively marketing it to you because they've been slow. And this is one area where Australia's small financial institutions have done a fantastic job and the large banks have not. So if you bank with a large bank and your large bank isn't advertising this system to you, go and complain to them please.

So we've got two more questions. Just on that point, I think there's a regional bank in this region that's already on the front of that curve, with the electronic payments, so … next question.

So I wanted to ask you a question where the, I know is the, with your role and I feel a lot of public confidence in your institution, by the way. That it makes me very focused on the standard economics that our western civilization on the large part is established.

But I'm wondering how much room do you have in treasury to also look out for the fact that we may have some very unexpected changes globally in ways that are completely new and different scenarios? What capacity can you, do you have some capacity to look at how people who are looking out of the box scenarios as well as the standard expectations? And can I just give one example of this to what I'm talking about? Over the last 20 years in Australia we've had a very focus of change from detaching us from seeing ourselves as a part of Europe and the United States only.

And moving into China and Asia, which has been a good thing. We needed to break that old image. But I've also noticed that there's two remaining continents on this planet that over the next few hundred years are going to be the major economic developments and that's Africa and South America and I noticed that we're a continent that sits right between those two very conveniently. So in terms being in Treasury, and I believe you probably have some role at looking at our long term way to improve our prosperity as a nation, should we also be considering a relationship with these two continents and not just in China and Asia so we're not so locked in as an example of that out of the box type thinking.

So I'm really wondering, do you feel you've been adequately resourced by the other half to consider these different scenarios as well as the standard economics.

The resourcing of the Reserve Bank is very good. I've a very effective organisation and we're well resourced, so I haven't got any complaints about lack of resourcing. We've got a an economic research department, one of the few government entities that's been able to maintain a strong research department and when I go and meet with them, they were always thinking things out of the box and sometimes I have to get them back into the box.

There's a lot of free thinking within the Reserve Bank. We've got a very strong research department and whether we should be looking East and West more, I don't know the answer to that, that's beyond my normal timeframe. But I do think we need to develop stronger relationships with India and Indonesia, two incredibly populous countries that are going to do well over the next couple of decades and we can benefit from that; and probably the last observation I'll make is diversification is always good, isn't it? So the more relationships we have, the better.

Thank you, I take real public confidence in that, because I think we do need to be adaptive as a small nation and that's really worth showing to you; and also too, can you talk to [unclear 49:13] significant government funding more often because it's been so fantastic having you here.

That's not my job. My job is inflation control.

What are your thoughts on the physical currency in Australia. Do you think eventually we'll move to a digital currency, and if so how long will that be?

That's a very good question. It might surprise you to know that even though we're all using tap and go payments, the stock of banknotes on issue at the moment, relative to the size of the economy is the highest in more than 50 years. How many hundred-dollar notes do you think there are out there for every person in the country? The answer is 14 for every single person; and there are 30 $50 notes out there for every person. So there's still a lot of physical currency. I don't have my share. I don't know about you. So for some reason, and I think I understand broadly why people still want to hold banknotes. I don't think we're going to need a digital currency in Australia for regular payments because we have the NPP -- the New Payments Platform -- and tomorrow you're all going to have your pay IDs.

That system allows you to move money between bank accounts straight away. So I don't see why we would need a digital currency to sit alongside bank-to-bank transfers. So, I could be wrong and new innovations come along. But I think if we're all using this new payment system, that's pretty much a digital currency because we can move money between accounts instantaneously.

We'll make this the last question please and right up close again.

Thank you for the honour of having the last question. Dr Lowe, thank you very much for your presentation and for coming to Armidale. My question, you pointed to a number of issues: stagnant wage growth, low productivity growth, and also the reluctance of private businesses to invest. I noticed recently that UBS reported that most of the employment growth in Australia over the last few years has been in the public sector. Do you think that somehow contributes to these problems because public sector has wage caps, it has a low productivity and the increased number of bureaucrats and regulations inhibits private sector investment and innovation, et cetera. Which really leads into my specific question: What specific structural reforms would you like to see governments in Australia undertake to lead to an opportunity for businesses to invest?

Again, my job isn't to advise the government. Every time I appear before the parliamentary committees, they ask me the same questions and every time they ask me that question I say, well go and read the report you've commissioned.

The government is very good at commissioning reports and those reports have fantastic ideas in them, but we haven't implemented many of those ideas and if I may, I'll just quickly read my list here that I give to them each time. I say its infrastructure, the way we select projects, the way we price infrastructure and the way we share risk between the public and private sectors. The way we run the education system and our comparative advantage up until now has really been built on what's in our land and what we can grow on our land. But increasingly, our comparative advantage is going to be built on what's in our mind. So our education system is incredibly important. There are endless reports on how to do that well.

A third area is the culture of innovation and entrepreneurship. I think as I said before, we're too risk averse and we need to somehow address that. Anyone who looks at our tax system would not say it's optimally designed for productivity – the way we tax land, the balance between consumption and income taxes and incentives for innovation, the tax system.

And the final area would be the way we deliver government services. Government delivers services to many people in the country and the government has the capacity to use big data to really improve the quality of those services. So, now this isn't my list, this is the list that comes from reading reports, which I've done. And I encourage others who are interested to read many reports there because we need to create this environment where firms want, and this is the last time I'll say it, to expand, innovate, invest and hire people; and if we address at least one or two of these areas, I think we could make a difference.