Transcript of Question & Answer Session The Year Ahead

Thank you, Governor. When the Board sat down yesterday to discuss the impacts of what's happened in Australia in the last two months, particularly the bushfires, did the Board, as well as discussing the immediate impacts on the economy … you've mentioned in your speech that you were also factoring in climate change; but is there more thinking and consideration going into whether this is a one-off event, or it's something that Australia and the Board needs to be factoring in, might be a more frequent event, given what Ross Garnaut was saying more than a decade ago?

We didn't have yesterday an extended discussion of that particular issue as we had a lot of other things on our agenda. But I think it's pretty clear that average temperatures are rising, and they're more variable, and we know that it is going to have economic consequences in Australia, and around the world. We're not part of the debate about what to do about it, but our job is to try and understand the economic and financial effects. I think we're seeing climate change affect patterns of production and distribution, and investment; we're seeing the cost and availability of insurance change, which is going to affect where people invest. It's clearly affecting the value of some existing assets. Money is going to have to be spent on mitigation and adaptation; that's money we can't spend elsewhere. It's also opening up the possibility of new industries.

The fact that it's affecting the value of assets and can likely do that in the future means that there are financial stability implications over time; we're likely to see at some point some stranded assets, and their value falls. So we've been encouraging financial institutions, together with APRA, to understand those risks. As part of our efforts we're joining with other regulators through the Council of Financial Regulators to understand the financial risks, and a number of my colleagues are involved in international discussions as well. So I think the effects are profound, and our job is really to try and understand them as best we can.

Thank you, Governor. As I call upon my colleagues, could you please also identify the organisation you work with. Matt Wade.

Governor Lowe, I'd like to ask you about unemployment, which you mentioned in your speech. Your charts showed that our unemployment rate is a fair bit higher than some of our peers, like the US, the UK, and New Zealand. It's been at five per cent for more than a decade, or most of this decade, and the total number of people out of work in Australia has been above 700,000 for some time. I've got three points I'd like to ask you. Does the RBA Board ever have a formal process of talking to or hearing from unemployed people, in the course of your deliberations? Are there policy settings that could be changed to reduce the unemployment rate further in a faster timeframe than you're talking about, or should we just simply adjust to an unemployment rate around five per cent?

Those are three good questions. Perhaps before I answer them, I'd point out one other fact. In Australia, the ratio of employment to population is as high as it's ever been. A higher share of the Australia population have a job today than they've ever had in the past, and the share of Australians that have a job is higher than the share of Americans that have a job. So even though their unemployment rate is lower, there are a lot of people who have become detached from the labour force, and just aren't participating. It would be great to have a lower unemployment rate, but in Australia we have very high labour force participation now, and as I said, a higher share of the population have a job than ever before. So the unemployment rate isn't kind of the only summary statistic of what's going on out in the labour market. Over recent years, we've had extraordinarily strong employment growth in Australia; it's averaged two, two and a half per cent, and the population is only growing one and a half per cent. We haven't made further progress in reducing the unemployment rate, because there's been an increase in labour supply, and increased participation. So I think we need to keep that in mind.

Your three questions - do we have a program of talking to unemployed people? The answer to that is no; but we do talk to a lot of community organisations that help support unemployed people, so we have a sense through those discussions about the issues that people face. Are there further policy settings that could be adjusted to reduce unemployment? We're doing what we can. I think we've got very stimulatory monetary policy. Our expectation and hope is that eventually that will do enough to drive the unemployment rate lower; and it's really up to the government to decide whether they would want to use fiscal policy. That's the other policy tool, and that's really up to them. And the third question is do we just have to accept higher unemployment; the answer to that is no. Our strategy is to keep interest rates low, hopefully for a long period of time; that will allow more investment in the economy and people will have more confidence, they'll hire people, and gradually we'll get the unemployment rate down. We'd like to see it come down more quickly, but we have to be realistic. We feel like we're doing what we can to support low unemployment in the country, and it's working. Employment growth has been strong. We'd like the unemployment rate to come down more quickly, but there's a limit to what we at the central bank can achieve here.

Also, I should have said, we do have a long list of journalists; could we please stick to one question per person. Phillip Lasker.

Governor, coronavirus, bushfires, ongoing drought; the one thing that hasn't changed are your growth forecasts. I'm just wondering, is what's happening now any sort of a wake-up call for policymakers, the RBA and government, and to what extent is their response to these problems inhibiting, or headwinds for economic growth and the economy? Are we too reliant on China, perhaps? Should we be taking more aggressive action on climate change? Would they all help us get through these problems more easily?

You started off with a premise that our growth forecasts haven't changed, and that's true for the year-ended growth rates for 2020 and 21, because we largely see the fires and the virus as having a short-term impact on growth. So when we publish our growth forecasts, you'll see that year-ended growth to the June quarter will be lower, but we're expecting lower growth in the short-term and then bounce back as the recovery takes place, and hopefully the virus gets under control, and there'll be economic stimulus in China, and we'll see a bounce-back. So there is an effect right now, and it's going to last for a while, we hope; and then we'll see it bounce back. So for the year as a whole, we're not expecting a material effect. Is it a kind of a wake-up call? That's kind of beyond my area of expertise. The one thing that I do think would really help is this focus on investment. I think the country does face a challenge in lifting productivity growth. These issues we're dealing with at the moment, and the virus, and the fires, they're significant, but hopefully they're temporary. Over time, to really make a difference to our living standards, we've got to lift productivity growth; and there's no shortage of ideas for the country to be investing in. We have fantastic fundamentals, and I'd like to see more investment. I don't know whether it's a wake-up call, but it should be a challenge to us all: What can we do to lift productivity growth to drive increases in our living standards?

Michael Pascoe.

Governor, has the combination of bushfires, the coronavirus, and bad news polls achieved what economic argument could not? Do you expect more fiscal stimulus from the federal government? Net fiscal stimulus?

I'm responsible for monetary policy, so I don't know what the expectation is. I think we will see … I know we're seeing some additional spending to help people that have been affected by the bushfires. Whether that counts as fiscal stimulus, I'll leave others to determine that. I'm not going to kind of say what the government is going to do; it's not my area of responsibility.

The Treasury secretary sits on your board; what he knew, did that have any bearing on your decision yesterday?

Well, he's a board member, so he has the same bearing as the other eight board members. I think kind of longer term, there is an issue about the intersection of monetary and fiscal policy. The standard way of thinking for the last 20 years has been that monetary policy really is the stabiliser; it deals with the economic cycle, and fiscal policy just deals with structural issues. But with interest rates as low as they are, there is limited scope in the future, probably, for monetary policy to play exactly the same role that it used to play. We don't have the capacity to lower interest rates a lot further, and we have some other tools, but you know, how effective they're going to be, we're unsure.

So I think there is a debate or a discussion that we'll have to have, that the economics profession and the community will have to have over time, is does the relationship between monetary and fiscal policy change, and can or should fiscal policy play a greater role in economic stabilisation. It's not a reflection on where we are right now, but I think we need to think about that issue over time. Is there more that fiscal policy can do, if monetary policy can't do it; or are there so many problems in using fiscal policy that it's just too hard to do? This discussion is taking place between the Reserve Bank and Treasury, and in the international forums that I go to with the other central bank governors, it's something we talk about a lot. If we're constrained, what else can be done? And one thing that could be done is using fiscal policy, but fiscal policy comes with problems as well.

Swati Pandey.

My question is, is it fair to say that the board no longer sees a strong case for easing? Is the bar higher, now? Secondly, when you talk about unemployment trending lower, what timeframe are you looking at? Are you looking at two months of data before you make that decision, three months, six months? What's your timeframe? Thank you.

I wouldn't quite frame it as the board doesn't see a strong case for easing. I mean, I can see the case for further easing; as I said, it would help with the balance sheet adjustment, and it would have the effect on the exchange rate. But there are risks with very low interest rates, and we need to balance those risks off against the benefits we get. At the moment, we're projecting some progress towards full employment, and a lift in inflation over time. So where we sit right at the moment, it didn't seem that the benefits that we would get from lower interest rates right now would outweigh those risks.

That could change, and I can't put for you a timeframe on when that might happen. There's no critical level of the unemployment rate we're looking at, but if we thought things were moving in the wrong direction, we'd see the benefits of lower interest rates be greater, and the risks being less. So that balance would change. But we're not thinking about it in terms of numbers of dates, but it's the general story, ‘Are things still moving in the right direction?’ which I think at the moment they are; if they're not, then either us or the government would have to do something.

One risk of cutting rates further would be another flood of letters on your desk; do you respond to those letters personally?

I do, as long as they're not abusive. If people are rude to me, then I tend not to respond; but many of the people who write to me, I have a great deal of empathy for. The typical letter would say, ‘I've saved hard all my life, I've tried to be conservative, I'm holding my money in term deposits because I don't want to invest in the equity markets because I'm in my 70s …’ or 80s, or even older, ‘… and I'm finding it very, very difficult.’ And at a personal level, I have a great deal of empathy for that. So as long as people are not abusive, and some people find it appropriate to be very abusive … as long as they're not, I try and write back, yes.

Jamie Smyth.

Good afternoon Governor. This week marks the anniversary …

Stand up, please.

Sorry. Good afternoon, Governor. This week marks the anniversary of the Royal Commission into misconduct in the financial services sector. Can you say with any certainty one year on that there is cultural change that has taken place within the financial institutions, and within the regulators? Are there any specific areas where you would point out that more needs to be done? Thank you.

That's a very good question, and I think one year on, I think we're seeing that … Well, something that I said at the time, there is benefit from shining the spotlight on what was going on in the bank sector. The sunlight has really kind of helped clean things up a bit. I'm confident that we're going to have a stronger and better financial system that serves people's interests more effectively as a result of the Royal Commission. You asked am I confident that there's been cultural change; I think there's not kind of a yes or no answer to that. There is a process of cultural change going on, and I see that. I see financial institutions being more focused on service and customer outcomes, rather than sales; but this is a process.

I see financial institutions more seriously addressing conflict of interest issues than they did in the past. There is a much greater focus on accountability inside financial institutions, and from my discussions with a number of boards, I sense a much greater focus on nonfinancial risks, rather than just kind of maximising the short-term profits. So this is a process that's going on; it's not something that changes overnight. It probably takes many, many years, but I see enough signs that that process is taking place, and I have confidence about the future.

Within the regulators, I know there's been a significant change; I chair the Council of Financial Regulators, and I see that there's much greater focus on enforcement than there was previously; and from many perspectives, that's a good thing. From the perspective of prudential regulation, I think we can move too far towards an enforcement mentality, because one of the things about prudential regulation is supervision is as important as regulation. I've seen over the years many cases where APRA and previously at the Reserve Bank would be speaking to financial institutions about what was going on, suggesting the board rethink something, or move in a different direction; and it's not as a result of some black letter law, some enforcement action; it's a result of supervision and an open and constructive relationship with the regulated entities. So I think it's really important we achieve that.

So a much greater focus on enforcement, but at the same time, and I think APRA recognises this, supervision is actually as an important tool as enforcement and we can't lose sight of that.

Jonathan Shapiro.

Thanks, Governor Lowe. I have very two very quick questions. One is do you think the coronavirus exposes our economic reliance on China, and the second question is are you comfortable with the current level of the Australian dollar?

On the virus, does it expose our reliance on China; I think it highlights it, but we all knew that anyhow, didn't we? China is the destination of most of our exports; it's incredibly important increasingly for tourism and for higher education. So we all knew that; so I don't think we needed the coronavirus to kind of tell us that. As I said in the SARS case, we did see a sharp contraction in China's output, two per cent in one quarter; and then it did bounce back. It's quite possible we'll see the same thing this time. I think the interruption to the Chinese economy in the short term may be greater.

I've seen estimates that say that air and rail transport have fallen 70 per cent, spending in some areas is down a long way, and we're now starting to hear some examples of interruptions to supply chains, affecting production elsewhere, not just in China but around the world. So it's possible that the effects are bigger; but we also saw on the weekend the Chinese central bank announce some measures to support the economy, and the Chinese President also said on the weekend that they will announce stimulus measures, particularly in the infrastructure space.

So I think it's important we don't catastrophise, here. It's possible this does not work out well, but it's also possible that the SARS experience is a reasonable guide to what happens here. Sorry, I lost track of the second question. Am I allowed to answer a second one?

I was going to say, that might be the benefit of losing track of the second question, that we might move on. Peter Ryan.

As journalists, we're always looking for colour, light, and shade in our reporting, so it's great to have you here for two years in a row. Just on the climate change matter, and you've now indicated that that's well and truly factored into monetary policy deliberations, what sort of discussions, debates, or arguments might you have within the RBA board about climate change, particularly in the leadup to the bushfires that we saw? And as other people are asking a secondary question, I'll ask one; what's your message to climate change deniers, particularly those who might be in certain parts of the government?

I have no message. It's not my responsibility or appropriate for me to be giving messages on that topic. We have no role in climate change policy. But what I am responsible for is understanding what's going on in the economy, and how higher temperatures and more variable climate affects financial risks. So that's very much our focus, as I said in response to the first question, and it's not my role. It would be inappropriate for me to be sending messages to government how to deal with this issue; it's a matter for the parliament, and for business to deal with. All the central bank can do is respond to the world we face, and that world is a hotter one, and with more variable weather; and has economic and financial impacts, and we try and understand those.

Jessica Irvine.

Happy New Year, Phil. Did you get a chance to go away on a holiday, and where did you go? Because economists are saying that you've come back rather optimistic about the future of the Australian economy, and I might like to go there next year.

[audience laughter]

And a second question, last year we had a fun debate on semantics about the difference between a coin toss, 50-50, 52-48, regarding the future probability of interest rate movements. You stood up last year and shifted from it being a situation of rates more likely to go up than down, and you axed that and said evenly balanced; and then we went into a year where you cut interest rates three times. So you must have thought at some point rates were more likely to go down than up. So this year, are you evenly balanced, or do you agree with the statement that interest rates are more likely to go down than up, from here?

Two big questions, quite a way apart from one another. Yeah, I had a three-week holiday. As most of you journalists would know, the Reserve Bank board does not meet in January, so that's the only time of the year I get to have a break. I've got three teenage children, so it's good to spend time with them. We had one week at home, and then we went to California for two weeks as well, and I spent time in San Francisco and Palm Springs, playing golf with my three kids. So that was a lot of fun.

In terms of the balance of probabilities on interest rates, you're right, last year at this lunch there was a switch to essentially 50-50. At the moment, the probability of an interest rate increase any time soon is very low. Things would have to change tremendously for us to be even contemplating higher interest rates. It's possible that interest rates could come down; I'm hoping that that does not happen, because the scenario in which we would be reducing interest rates is one we're not making progress towards full employment and inflation target. It's possible that we don't make further progress; that we find that growth disappoints again on the downside. So the probability of an interest rate cut is obviously higher than an increase.

My hope, and I think it's a reasonable expectation, is that we could have a period of stability again, as we continue to make progress. We get through these current interruptions to growth obviously in the December and the March quarters; and beyond that, we benefit from the fact that households are getting their balance sheets in a better position. The housing market is rising. The residential construction sector is in an upswing, and the resource sector is in expansion mode, in terms of investment, for the first time in seven years. Those things, I'm hoping, will be enough to get progress towards full employment inflation target. But if we don't see that progress, or we think it's at serious risk, I think it's right to have interest rates back on the agenda.

Jess [Ainko 0:23:11]

Governor, what is the RBA planning to do to stop banks gouging retails with tap-and-go fees?

I guess here you're referring to least cost routing. For those who are not aware of this issue, when you use your debit card at a machine, a tap-and-go one, most debit cards allow you to route that transaction either through the Visa/Mastercard schemes, or the EFTPOS scheme. For the merchant, it's much cheaper if it's routed through the EFTPOS scheme, rather than the international scheme, so the merchant pays a lot less. Most of the time – not all the time, but almost all the time – I, as the consumer, don't care which payment rails it goes through; I just want it to come out of my account and pay for the goods and services. We have made it very clear to the banking industry that we expect them to develop the functionality to allow the merchant to choose which payment rails it goes through, the international schemes, or the EFTPOS schemes.

We put quite a lot of pressure on the banks to do this; my understanding is that they've now developed the technology and solutions, and we're encouraging the merchants to actually go to their banks and say, ‘Turn on this functionality for me.’ So what we're doing at the moment is bringing attention to the issue, and encouraging merchants to actually ask their banks for the better deal. If that process doesn't work, then we would have to consider a regulatory solution. Regulating here is not the preferred option, but it is a fallback option if we don't see the required change.

Peter Switzer.

Some people in the media are really lucky in the sense that they get to watch movie stars and sports stars, but most of us here watch you.

[audience laughter]

I'm sorry.

[audience laughter]

No, but it's a tough job; some of us have to do it. We try to guess the way you're thinking, and you've given me a bit of a hint just a moment ago by saying most of us think that you don't really want to cut interest rates anymore; you'd like to think this economy could come good where rates are now. But I also know you're an economist, and therefore you know that the budget deficit is a really important part of what might happen to interest rates. So, what number do you want to see for the budget deficit in May, when Josh Frydenberg speaks? What number will make you really happy, and just jump out of your chair, and go, ‘Yes! Well done, Josh!’ What number is that?

[audience laughter]

Well, I'm not prone to jump out of my chair. [audience laughter] And certainly the budget normally doesn't encourage me to do that. I know there's a lot of public discussion on the surplus, and how big it should be, and whether the government should do more or less. I mean, I understand why everyone is interested in that issue, but for me, it's not the main issue. Whether the government has a small budget or a surplus, from an economic perspective, is not particularly important.

I think there are two real issues though, in fiscal space, that we should be talking about over time; and I've touched on one of them, and that's the relative roles of fiscal and monetary policy in economic stabilisation. That's a much more important issue than whether we have a small surplus or a small deficit. And the second one is, what scope is there for fiscal policy and government policy to address the investment issues I talked about. You know, you can undertake investments that don't affect the current budget deficit. There's been an increase in public investment; we've seen the federal government with a 10-year, 100 billion-dollar program, and the state governments are investing in infrastructure as well.

In an environment where interest rates are very low, I think yesterday the government's borrowing costs for 10 years were essentially the lowest they've been since federation. So are there investments that the government could make, or could encourage the private sector to make, that would yield risk-adjusted rates of return greater than the lowest interest rates on record? For me, that's a much more important issue for us to be thinking about; can a government use its balance sheet or create an environment where the private sector wants to use its balance sheet to undertake the investments the country needs. I encourage you to all think about that issue, much more than whether it's a budget, or a deficit, or a surplus. What would make me jump out of my chair is a renewed kind of enthusiasm for investment in the country, because I think that's in our collective interest.

Governor, we're almost at time; would you take a couple more questions, please?

I am in your hands.

Fantastic. Ricardo Goncalves.

Governor, just a quick one on the coronavirus again. Would you be surprised if we saw negative GDP as a result of the coronavirus, say in this quarter?

I would be surprised. I mean, remember, we're only one month through the March quarter; we've got two months to go. To get a negative quarter this quarter, I think we'd have to see an acceleration of the problems, and intensification of the efforts that the Chinese and others have made to contain it not be successful. Because I think we're starting to see mining investment pick up; I'm hopeful the balance sheet process that households have been going through that I talked about will see consumption growth pick up, and the decline from residential construction activities coming to an end. So I think there's enough positives there. I think we'll only see a negative if the current situation isn't contained.

Sheryle Bagwell.

Hi. Unfortunately, most of my ideas have been taken; but on that business investment, because I've been away for a year, come back to three interest rate cuts in a year, another one expected, but still as you say, business investment remains extraordinarily sluggish. So why aren't those cuts working? Second quick question, unemployment is the key as to whether we get another cut, you've suggested; how much do you take into account Australia's extraordinary level of underemployment, when you calculate where monetary policy goes?

On underemployment, we look at it very carefully. I often use unemployment as a shorthand; I probably should say, ‘unemployment and underemployment’, but it becomes kind of a mouthful, as you would appreciate. So each time at our board meetings and in our internal discussions, we're looking at underemployment all the time; and there's quite a lot of underemployment, and that's largely coming about from people who are working part-time who would like more hours. Now, a third of the workforce in Australia now work part-time, which from many perspectives is a really good thing. We're seeing a lot of people have options. When I was first entering the workforce, you either worked 40 hours, or zero. Now you can work five, or 10, or 25. So from some people's perspective, that's good, and I think that would be my perspective as well; but there are a group of people who actually want more hours, and we take that into account when we're thinking about the strength of the labour market inflation pressures.

You said that you didn't think that the interest rate cuts were working. At the moment they're not working to lift private investment, and I wouldn't expect them to, in the short term, anyhow; but I just want to push back against the idea that interest rate cuts are not working. Today, we've got the lowest exchange rate in I think a decade; that's not unrelated to our decisions on interest rates, and the lower exchange rate is making businesses more competitive, and that supports jobs. The lower interest rates are helping with this process of balance sheet adjustment.

If you accept the idea that the households were adjusting to lower wage growth and falling housing prices, do you think that adjustment would have been easier or harder if we'd had higher interest rates? A proposition that I put in my remarks is it would have been harder if we'd had higher interest rates. The lower interest rates allow people to pay off their debts a bit more quickly, and it's boosted the value of their assets, and getting their balance sheets into a more comfortable position more quickly. That's helping. So they're the two main channels through which the easing of monetary policy over the past year has helped.

In time, if consumers start spending again, and the exchange rate is at a better level, that will lift business investment, because people will feel better about the future. So that's the process, but it takes time, and in yesterday's statement and in my remarks today, I talk about the long and variable lags. This is why there are long and variable lags. It takes time. People start spending, then businesses think, ‘Maybe I'll invest a bit, maybe I won't.’ Takes time. So this is the process we're going through. So I just push back against the idea that what we're doing isn't working. I think we'd be in a more difficult position if we had not cut interest rates last year.

Our last question, and hopefully it's one question. David Rogers.

Dr Lowe, thank you for such a candid speech. I just want to ask you, you said that rising asset prices and risk-taking can be a good thing for the global economy, but it can have too much of a good thing. Can you give us an indication of how close we might be to too much of a good thing, and what the FSA is looking at in regard to that?

Kind of both globally, and I think it's an issue domestically as well, as I said a couple of times, the effects of the interest rates cuts so far have been positive. They've encouraged people to kind of pay back their debts a bit more quickly, and pushed up asset prices; but it is possible we get to the point where the lower interest rates don't just encourage people to pay their debts more quickly, or allow them to do that, but actually encourage other people to take on more debt. If that happens, then asset prices could go up further. So this is why we're watching trends in debt so carefully, because we wouldn't like to see lower interest rates just encourage another borrowing boom. The same discussion is taking place internationally.

At the moment, credit growth around the world is not particularly high, but there are pockets. The leveraged loan market in the US is one example of that, where there is a greater willingness to take risk; and the international regulatory community is concerned about that. So at the moment, I think it's okay; but there's a concern that we could be getting close to a crossover point, where what's been a good thing may not be such a good thing in the future. There's no kind of precise point at which we get to that crossover point, so it's a judgment issue, and we're just trying to follow it very carefully, both here and overseas.

Sorry, what was that thing in the US market you were looking at? What market was stretched?

The leveraged loan market, and there's been a lot of corporates issuing very low-rated debt with quite weak covenants. So there's quite a lot of concern, particularly in the United States, that that market could be too exuberant.