Transcript of Question & Answer Session Reserve Bank Review

One of the recommendations was about the elevation of full employment and price stability, so both of them should have equal weighting in the thinking about interest rate decisions. Are those two areas … could you help me understand, don’t they pull in different directions at times?

The proposal is that the objectives of the Bank get narrowed to price stability and full employment and the welfare of the people, which is the third current objective, that becomes an overarching purpose of the Bank rather than an explicit objective. So the objectives will be price stability and full employment, and I don’t see those two things in conflict because you can’t have full employment if you don’t have price stability. At the moment we’re trying to generate a return to inflation of 2–3 per cent, and the ultimate objective there is to make sure that people have jobs and the country can operate close to full employment. So those two things are not in conflict. In the short run, there’s a trade-off obviously. But in the long run, they’re perfectly consistent. And the weighting that’s given to each of them in decision-making is something that we can’t determine from meeting to meeting, but they’re not inconsistent with one another.

Philip Lowe, thank you for your comments. The Treasurer, Jim Chalmers, said just an hour or so ago that he would be looking at the RBA Governor’s position in the middle of the year. Your term ends in September, the current term. Are you hopeful or expecting another term?

Well, it’s a great honour and it’s a great privilege to have the job that I have, and I would say it’s also a great responsibility. It’s entirely up to the government whether I continue to serve in this role after September. If I was asked to continue, I would. If I’m not asked to continue, I’ll find another way to contribute to Australian society.

Governor, could I just ask you about the issue of full employment. If it is to be one of the hallmarks, you have actually changed your definition of ‘full employment’ in the past as the unemployment rate has fallen. So, just as we have a price target, an inflation target, of 2–3 per cent, would it also make sense to have an employment target so that we know what full employment actually looks like in Australia because it seems over time that it has changed. Should it be 3½ to 4½ per cent, something of that nature?

The first point is that the objectives of the Bank aren’t going to change here – they’re going to be price stability and full employment, and that’s been the case since 1959. So the objectives of the Bank aren’t going to change. What we’re talking about here is the Statement on the Conduct of Monetary Policy, which is the agreement between the Bank and the Treasurer. So there’ll be more fulsome language about how we think about the short-term trade-offs but also the long-term consistency. So the objectives aren’t changing. The narrower question is: should we specify what ‘full employment’ is?

That’s what I’m actually asking …

I heard the Treasurer respond to that question half an hour ago and he said: ‘If you ask 10 economists, you’ll get 10 different answers’. But our current assessment is that full employment in Australia is probably an unemployment rate in the low 4s. We’ve got to take account of underemployment as well, which fits into the definition. Given it changes so much over time, I don’t think it makes sense to be prescriptive about what constitutes full employment. That’s in contrast to being prescriptive about the inflation rate we’re trying to achieve because being prescriptive about the inflation target provides a really strong term nominal anchor for people when they’re making their decisions. So I think they’re quite different.

Governor, the review raises several points about communication. There’s a view among experts that this place has been a closed shop for far too long and transparency around decision-making has been lacking. So when will those changes around transparency come into effect and can we expect to see you speaking to us in front of the cameras, speaking to the media more often, going from that next rate decision in a few weeks’ time?

Whether you see me more often or not I don’t know, because I’m already in front of these cameras a lot, so we may consider how that’s best done. The recommendation is that I do a press conference like this after each Monetary Policy Board meeting. I can understand why the Panel recommended that, so that makes sense. We have to work out how that fits in with the meeting schedule and the other communications. So whether you hear from me more or not I’m not sure, but the format might be different.

You accept though that there has been some communication that’s been open to misinterpretation, particularly the guidance around those rate rises not coming into effect until 2024? That was raised as a key issue.

It has been an issue, and we’ve responded to it publicly a number of times. We put out a review of our approach to forward guidance, and that has a number of lessons and we’ve learnt those. And we’ve heard the recommendations of the Panel. I understand where they’re coming from and we will respond to that, but we will respond holistically in terms of the number of meetings, the structure of the meetings, how the other Board members speak in public as well because, at the moment, the way the Board operates is that they’ve appointed me as their spokesperson for monetary policy and the Review Panel is recommending that the Board members also speak on the economy and monetary policy on at least some occasions. And if the Board decides that, that would have my strong support as well.

Governor, thank you for your time today. You’ve faced a lot of personal pressure on these rate rise decisions. Do you think the move to split the Board … do you think that would hopefully place less pressure on whoever is the next Governor, be it yourself or be it someone else, come September?

No, I don’t think the splitting of the Boards is going to affect that at all. The splitting of the Boards is about making sure there’s good oversight of the way I manage the Bank and then having separate people whose sole job is monetary policy. The Review Panel also suggests that the statement after each Board meeting is a statement from the Board rather than me personally. So, after each Board meeting, I put out a statement in my name and you all report that: ‘Philip Lowe said,’ and ‘Philip Lowe did this’. So the reporting, I hope, will be slightly different if you’re saying: ‘The Board says this,’ or ‘The Board says that’. So I think that’s a constructive change and would reduce the focus on me as an individual, because I’m just one individual here and we’ve got nine people taking these decisions.

Governor, thanks for the question. Just looking back at that 2024 rate signal, which was seen as forward guidance, do you think the criticism that you’ve received in the Review is fair, given the circumstances you were looking at? Back then at the height of the pandemic what I recall you were saying that you were wanting to offer as much comfort and to ease anxiety. Do you feel, I suppose, in any way personally slighted by that criticism?

I don’t think the Panel is criticising us there and certainly I don’t feel personally slighted. As I’ve said on other occasions, our approach during the pandemic was to do every single thing we could do to help Australia. We were facing dire circumstances. Remember we were locked down and it was projected that the economy would be weak for a long period of time, so we had a really strong insurance mindset. We wanted to do everything we could, and it turned out we did too much. And certainly, with the benefit of hindsight, you look at it and say, ‘Well, you shouldn’t have done that’ and I accept that criticism. But what I try and explain to people is the situation was dire and, in the meetings we had in the room next door, we were saying we don’t want to leave any stone unturned in protecting and insuring the Australian economy. That’s what we did. It turned out we rebounded from the pandemic quicker than anyone expected and we had to wind back. And people borrowed during the years when interest rates were very low and are now unhappy as interest rates are going up, and I understand that, and we’ve learnt some lessons about how to communicate in response to that.

Governor, thanks for your time. I want to go specifically to recommendation 2.2 where, under the new Statements [on the Conduct] of Monetary Policy, your regular communication, you’ll explain … the Bank explains how long inflation is expected to be away from the midpoint of target and how long away on the labour market. I’m wondering, do you envisage that as a time-bound sort of description, a condition-bound condition, and how regularly you would communicate that and in what way you would communicate this sort of focus on achieving the dual mandate of the Bank?

Thank you. It’s a good question, and we’re going to have to work through that at the Board. I really see it as, really, an elaboration of what we’re already doing. At the Press Club a couple of weeks ago, I said that we’re expecting to get inflation back to the top of the target band by mid-2025, and I talked about the possibility of doing it, of getting inflation back to the target band earlier than that and the consequences of that and the trade-offs that the Board has been considering. So what I imagine will happen as we develop this recommendation is we’ll do more communication along those lines. So it’s not a fundamental change from what we’re currently doing. It’s really, I’d say, an enhancement and an elaboration of the current approach, because we’re already doing this.

Thanks, Governor. You previously defended the make­up of the Board. Do you agree with the findings of the Review that the Board is, in fact, lacking in the knowledge required to both challenge you and set monetary policy?

I hear that in the Review. I think one observation I’d make through the Review process, which I said was kind of excellent, is that the Review Panel did not sit in the Boardroom. And the description of how the Board process works and the challenge in the Boardroom that the Panel has, doesn’t particularly resonate with me. In the Boardroom, right next door, what I see are nine people, who are deeply engaged in the questions, who bring a great deal of expertise to the issues we’re dealing with. They’re probing, they challenge me and sometimes I speak last in the meetings. So the idea that the Board members sit there meekly and accept the recommendations that I put to them is very far from the reality that I’ve lived as the Governor. So that part of the Review discussion didn’t really resonate with me. But I do hear them when they say they would like to see more monetary policy and financial expertise on the Board. And I understand why they’re saying that, but I think I find that part of the Review discussion not quite lining up with the reality that I know. So I’ve defended the process in the past. We’ve got nine people making those decisions and they do it very diligently and have expertise, but that’s not to say we couldn’t have a different structure that would help. I’ve defended the Board in the past because I think it’s worked very effectively and people take their jobs incredibly seriously.

G’day. I want to (inaudible) one for you. The power to direct the lending policy of banks – has that ever been used and would you ever consider employing that in the future?

Perhaps, kind of in the depths of history it was used when we used to operate monetary policy by quantity targets. But, since we’ve had kind of a modern set-up, that’s never been used and I could never imagine it being used. I really think it’s a relic from the previous generation and it’s part of good housekeeping to remove those relics from legislation. So I have no anticipation that we would ever use that and I support its removal.

Thanks very much, Dr Lowe. My question …, you talked about how that section of the Review didn’t really resonate with you, the description of the Board process in coming to decisions around interest rates. But can you tell us: how will monetary policy decisions be improved by having a separate Monetary Policy Board with more experts on it?

Well, the Board will have a sole focus on monetary policy. At the moment it has some limited governance oversight as well, so its sole focus will be monetary policy. But the other set of changes that are recommended in the Review is that the Bank change internally the type of material it gives to the Board. It’s recommending that we give to them more analysis, more research, more detailed … and we engage the Board more fully in kind of the underpinnings of the kind of analysis and the forecasts that we present to them. So I imagine, when we give effect to that, our Board meetings will be longer and the Board members will have to spend more time here and they’ll engage with the staff. So that process, I think, will help. So it’s not changing the kind of … having these two separate boards or even changing the personnel of the Board – it’s a richer interaction between the Board and the Bank’s staff, I think, will help both the staff and the Board.

Hello, Governor. My question is on the communication part of it. Given that RBA Board members will now be doing more public engagement, I just wonder if you’re worried about too much noise that will come on monetary policy, with so many people talking and giving their views and opinions as well.

Well, you can communicate too little but you can also communicate too much. And I’ve been very conscious of this while I’ve been the Governor that I give a public speech once a month, and kind of more than that is probably too much. In some other countries, you’ve got a lot of people speaking about monetary policy and that adds to noise, so we’re going to have to work out a way to have more people speak and to do it in a consistent way which doesn’t create noise. So that’s one of the issues we’re going to have to work through. But you’re right, in principle, you can communicate too much, but you can communicate too little as well. So our job here now is to find the right balance.

Governor, thanks very much for taking questions. You’ve previously stated several times one of the strengths of the RBA in its current format is the frequency of Board meetings – having 11, and it means you can quickly respond to issues as they come up. Do you think changing that to eight for the Monetary Policy Committee recommended by the Review reduces that strength?

We’ll have to work through that. I’ve valued meeting 11 times a year and I’ve spoken of the benefits of those, as you’ve just said, but other central banks around the world meet eight times a year and they seem to manage. So, there’s a trade-off there: the frequency of meetings and the responsiveness that we can have with monetary policy. The other consideration that feeds into here is communication because if we were to have 11 meetings a year and I did a press conference after every meeting, plus five appearances before parliament, plus speeches in kind of public gatherings, I think we would be in the world of too much communication. So we’ve got to get the right balance here. Eight works in other countries, it could work here, and the Board is going to have to have a discussion over coming meetings about whether it wants to move away from the first Tuesday of every month, except for January, which is well-established and understood, but you might have to get used to a different rhythm.

Thank you, Governor. You said you didn’t take this personally, but the Review specifically delved into the RBA’s performance since 2016, the year you were appointed Governor. How can you not take this personally?

I don’t take this personally, because I’m just one person on a Board of nine in a staff of 1,500. And I know, when I’m with the Board and with the staff, how dedicated we are to doing the right thing in the public interest. We don’t always get it right, but we always try and do the right thing by the Australian people, and I take great comfort from that. I also take comfort from the fact that the errors that we’ve made are really clear in other countries as well. Before the pandemic, inflation was low everywhere, not just Australia. Every country had a difficult period during the pandemic and responded really similarly with monetary policy and now every country has got high inflation. So while there’s a lot of kind of focus on us making decisions, we’re really making decisions in a global context and everyone is dealing with the same issues. So, when I talk with the other central bank governors, we’ve got the same issues and we’ve dealt with the same problems. So I don’t take it personally, because I’m just one person in an institution that every single day tries to do the best job for Australians; we don’t always get it right, but we always try to get it right.

Thank you very much. I wonder: after seven years of being Governor and having been in that role through some pretty sort of ‘rocky times’ with COVID and inflation rebounding, could you reflect on the role or the potential of monetary policy? I mean, this committee is talking about not only 2–3 per cent but maybe even trying to get it exactly in the middle and yet, as everyone knows, you don’t control fiscal policy, you don’t control global pandemics or whether one country invades another country. There’s a whole lot of structural issues in the economy, domestically and globally, which affect the role of inflation, and yet the RBA is expected to deliver within 2–3 per cent and maybe around 2½ per cent and, if not, explain why. I just wonder whether monetary policy … the capacity is overestimated and the report, in fact, emphasises the capacity of monetary policy but whether in a real world, in a very global world with major changes, you can really deliver on a very accurate, pinpointed monetary policy target.

Well, that’s exactly the reason why we have a flexible inflation target. You might remember, when inflation targets were first being put in place, there were kind of 2 to 4 – I used to call them ‘electric fences’, if you ever hit the boundary, you were supposed to have a nasty shock. We never bought into that model. We said what’s important is that we provide a strong nominal anchor for the community that, over long periods of time, inflation would kind of average 2-point-something. So that’s the nominal anchor that we want to provide. And we recognise, because of the factors you were talking about, that inflation from time to time is going to move outside that target range, and at the moment we’re experiencing one of those times. But I do think we can deliver over time, an average inflation rate of 2-point-something. We have the tools to do that but we do have to accept there’s going to be variation in it, and this is the biggest variation we’ve had in 30 years. But we will return to 2–3 per cent. We have the tools to do that and that’s our mandate, and that’s what we’ve set about doing. The Review Panel also recommends that, as part of the Statement on the Conduct of Monetary Policy, there’s some discussion of the interaction of fiscal and monetary policy and I’d very much welcome that as well so that both the government understands what we’re doing and we understand what the government is doing. And in some cases, respecting the independence of both the government and the RBA, we might be able to come up with a better solution.

Governor, I’m just wondering, is there a risk that the Monetary Policy Board could be stacked with academic economists, which may result in more groupthink and lose further touch with the real world facts and result in worse outcomes for the general population, the Australians that you’re trying do the best for?

I’m not sure I accept the premise that if it was academics we’d get worse outcomes. But to go to the substance, I think the risk of that is low because the Review Panel recommends that the Board be diverse and people from a broad range experiences. It explicitly says it’s not recommending an academic panel. It also recommends that appointments to the Board come from a list that Steven Kennedy, the Treasury Secretary, and I maintain, and a third person. And, when we are constructing the list – and the two appointments today come from that list – we’re looking at the metrics of skills we need. So, given that structure, I think the risk that you’re talking about is low.

Governor, you’ve expressed your desire to continue in this job beyond September. But given the fact that the Review, which is endorsed by the Treasurer, recommends significant change culturally, in terms of personnel, in terms of being open to criticism, in terms of having greater communication, why is it that, given you are currently the Reserve Bank Governor of the Reserve Bank as it currently is, why are you confident that you are the right Governor going forward beyond September?

That’s not the judgement for me to make. All I said was that if I was asked to stay, then I would; it’s an important, responsible and honourable job. So, if the government would like me to stay, then I’m happy to stay, but if they want to have somebody else for the reasons that you’re articulating, I’d perfectly understand that and I have other things to do with my life. So I’m not kind of making a pitch. I’m just saying, if they want me to stay, then I’m happy to do it; but if they want somebody else …

Then I’ll add one last thing. Are you confident that you could drive the changes to the Reserve Bank, as outlined in this Review?

Well, I’m certainly confident I would do my best, and it’s up to others to judge whether that’s good enough.

Thanks. This is probably risky because it’s a hypothetical, but if we adopted all the recommendations of the Review, do you think we’d still be in the same place where the economy is today, with high inflation and so on, if these recommendation came out a little earlier?

Well, it’s hypothetical. I would observe that most countries are in the same place. I’ve just been in Washington, we had meetings of the G20 and with the central bank governors, and we’re all dealing with exactly the same things and, through my period of governorship, we’ve all been dealing with exactly the same things: inflation being too low; kind of doing too much during the pandemic and wondering how that was going to work out; and now high inflation. So I think that’s the reality. We’re all dealing … all the advanced economies are dealing with exactly the same things and, no matter what structure you have at the central bank, you have to deal with those things. And I think it’s not correct to say that a different decision-making structure would make fundamentally different outcomes in these areas. We’re really talking about improvements at the margin because most of the issues we’re dealing with are driven by global developments and, no matter what structure you have at your central bank, you’re dealing with the same issues. So, I think the changes are positive, but I wouldn’t overestimate that they will fundamentally change how the economy works; we’re not suddenly going to be delivered 2.5 per cent inflation every year. So, it’s an improvement, but you’ve got to be realistic here.