Transcript of Question & Answer Session Some Closing Remarks

Thank you, Phil, for such an insightful speech and also for the humour. I’m glad that your seven years as Governor did improve after the first day of fearing you were part of a secret society. I think some people think economists are genuinely part of a secret society. But, anyway, we’ll move on from there. Phil has kindly agreed to take questions from the floor. There are speakers on either side of the stage. If you could, please come to the speaker and state your name and affiliation. There are media in the room. If we could please take questions from the ABE members and guests here today first, and then we’ll move to the media. Thank you.

First of all, I’d like to thank you for your contribution over so many years and for your speech today. I wanted to come back to the mug. You’ve talked today a lot about the challenges that face us and the challenges that the students online are going to have to tackle. When you think about the future and the glass half full, what are you optimistic about?

I’m incredibly optimistic about Australia’s prospects. We’ve got a country that’s still growing reasonably well. We’ve got fantastic natural resources. And we’ve got incredibly smart people, and people from all around the world want to come and live here. One of the challenges we have at the moment is that population growth is strong and is causing problems in the housing market. But people want to come here. They want to live here. They want to work here. And you can understand why they want to do that, because this is one of the best places in the world to live. We have responsible fiscal policy and we have good policy frameworks. There aren’t many places in the world you’d want to be, are there?

Governor Lowe, thank you for your closing remarks and congratulations on your extraordinary and impressive career. And also to Michele, congratulations on your extraordinary and impressive career and your elevation to the Reserve Bank governorship in a week or two. A country kid from Wagga Wagga, a country kid from Armidale – how good! So, Governor Lowe, you mentioned the Reserve Bank Review and you mentioned Reserve Bank independence. I wonder if you can make some closing ‘closing remarks’ on those two things together. Across the world, financial markets and general communities like Reserve Bank independence because it gets one set of policymakers making decisions and puts the politicians to one side. Across the world, the way they do it – the standard way – has been to have full-time insiders in the central bank making the decisions and, if there are outsiders involved, their role is much smaller. The standard way in, say, New Zealand, there are four full-time professionals against three outsiders. In the Bank of England, it’s five full-time professionals and four outsiders, often part-timers. In Canada, I think it’s six-nil to the full-time professionals. In the US, the Federal Reserve, it’s seven in DC, the Governors, and five regional presidents. And so the trick is, basically, the Governor can’t be rolled if he keeps his staff in line, and that’s how you do it. In Australia, how we’ve done it is with a Board of seven-two, but my strong sense is that the Governor – and I think the legislation is that the Governor is the decider, and that’s how we …

I’m sorry, but perhaps can I stop you there? The Reserve Bank Board has always consisted of nine people: the Governor, the Deputy Governor, the Treasury Secretary and six esteemed Australians. That is going to continue. And it’s never been the case that the Governor just comes with a recommendation and just forces it through. The decisions are genuinely taken by nine people together, and we discuss issues from every angle. So this idea that the Governor just decides what happens is wrong, and the recommended changes from the Review will continue that: nine eminent people making these decisions, and six of those people or seven of those people being outside of the organisation. I think is a good thing because it brings different perspectives and varieties. So I’m very supportive of the direction of change there.

So what do you say to the critics who say that, basically, an equally weighted vote is potentially a problem for Reserve Bank independence in that the two independent Reserve Bank staff are up against seven outsiders, including the Treasury? Is this model quite radical versus the models I’ve described in those other five countries?

No, well, I don’t want to continue this, but it’s exactly the same as the model we’ve had for 60 years.

Well, it’s not exactly the same, Sir.

No. You’ve got nine people appointed by the government, two insiders making the decisions, and that’s going to continue. And my judgement is that that’s worked well for 60 years.

First, I really appreciate that you dedicated your career and your life to helping maintain economic growth and reducing unemployment in Australia; I think that’s a really worthy thing that you’ve done. My question is: with the growing protectionism in the world, protectionism subsidies for particular industries with onshoring of manufacturing and certain production, what impact do you think this might have on economic growth and inflation in the long run?

The globalisation in the past two decades is one of the things that kept inflation down. China coming into the global economy, exporting low-cost manufacturing goods, helped us all and it made us all wealthier. So, to the extent that we’re retreating from that world, it’s a negative. We shouldn’t despair about that, though, because there are a lot of things that we can do internally, and I went through some of the areas where productivity growth could be lifted. Deglobalisation is a negative, but there are plenty of positives on the table that we can grab as well.

Phil, over your four-decade-long career, there’s been a decline in structural real interest rates – and I’m not suggesting that you’re responsible for that either. But it does introduce a problem for monetary policy or a challenge for monetary policy in that, more frequently, interest rates are likely to be at the zero lower bound. I think some have estimated that, in some countries, over a third of the time we could be at the zero lower bound. You spoke about some of the problems that Australia faced with the yield curve measures. Do you think there is an ongoing challenge for monetary policy in its ability to respond to cyclical demands at those times in the cycle, or are we going to be able to develop and use policies, such as quantitative easing, in an ongoing manner?

It’s a good question and one that I’ve thought about a lot. Once inflation comes back down again in the next couple of years, we could, in the future, find ourselves hitting the lower bound again. And, when we hit it in the most recent episode, we responded with a bond purchase and the yield targets, and that was helpful, but I don’t think it was particularly effective. This is why I floated the idea of closer coordination of fiscal and monetary policy because, I think, when you hit the zero lower bound, fiscal policy could play a bigger role in helping to get away from that, rather than relying on these monetary instruments, which have some effectiveness, but they’re limited in effectiveness. If you want to stimulate aggregate demand and inflation, there are fiscal tools that you can use as well. So, even in normal times, I think close coordination between fiscal and monetary policy is important, but it’s especially important when you’re at the lower bound.

I want to add my thanks as well, Dr Lowe, for your long and stellar service. I’ve always thought of your remarks and your involvement as thoughtful and steady-handed and thank you again for that. I also enjoyed the speech that you just gave and, obviously, there are four key themes that you’ve developed in that speech. It strikes me that three of them are really well covered already and are part of the national debate. We’ve decided on an inflation target. We have spent way too much ink talking about productivity and maybe have not done nearly enough on it. But there’s all sorts of ideas out there, and we’ve done a lot on asset prices and credit cycles. But what we haven’t done as much on is the other one you raise, which is that coordination of monetary and fiscal policy, which you just mentioned. I wonder if you’d be happy to elaborate a little bit on what direction we could travel in that way. I mean, when you have a democratic society, fiscal policy ends up being in the hands of the policymakers that are elected officials, and then we allocate an independent authority to manage the cycle, but I agree – and certainly agree – that there are better ways to do this. How do we go about institutional design that might allow us to be able to do this? This is very much in your area of expertise, no doubt.

Well, it’s a good question, but it’s a hard one. And this is why I said that I was disappointed that the RBA Review didn’t kind of tackle it, because I was hoping that the wisdom of the reviewers could kind of come together and provide some ideas. But I’ve noticed that people like Olivier Blanchard, who taught me when I was at MIT and then was the kind of Chief Economist at the IMF; he’s recently been talking about fiscal policy being used in this way through the creation of some semi-automatic stabilisers, in which some of the fiscal parameters get adjusted almost mechanically or that you give an independent body – not the Reserve Bank but some other independent body – the authority to adjust fiscal instruments within a certain range. So that’s quite a different institutional set-up from the one we have now. It may not be better than what we have now. But given the limitations with monetary policy, not just at the lower bound, but at other times, what we’re doing affects people very unevenly – I think we should aspire to kind of something better, and exploring some of these ideas might be the right way. It may not be, but it’s worth trying.

I hope to hear more from you in the future about that; that would be great.

Thank you, Governor, for your contribution to Australia; and a personal thank you from me, as a student of central banking, for your contribution to my learning. Of the two challenges in your term – low inflation and near zero interest rates, and high inflation – in hindsight, which one do you think was the bigger challenge, and why? And the reason I’m asking is because, when interest rates were low, I had central bankers tell me that raising interest rates is easier because, technically, there is no upper bound, and you know now that raising interest rates means a lot of negative press and media at your doorstep. So which one is the bigger challenge?

Well, by far, the biggest challenge that I faced was the pandemic. As I said in my prepared remarks, it was an incredibly scary time. The economy risked 15 per cent unemployment. We were being told the contraction could last for years and the vaccine wasn’t going to be developed, and we reduced interest rates to zero and we thought, ‘Well, probably that’s not enough.’ We coordinated very effectively with the government, and that helped, and we had to come up with these innovative policy instruments. So that was, by far, the most challenging time. And raising interest rates, while it makes you unpopular, it’s the right thing to do. And the job of the central bank and the central bank Governor is to be unpopular at certain points in time and do the right thing for the country, and that’s what we did.

Phil, Alan Greenspan famously said: ‘If what I have said is particularly clear, you have clearly misunderstood what I have said.’ Your style has been entirely different. I think your great legacy has been the way you’ve interpreted the economic conditions, the policy debate. And people at our level – we’re supposed to be professionals – have learnt so much and people in the public have learnt so much, and I think that’s an incredible legacy that you’ve left us. But Alan also said, when he was asked, ‘What is the neutral interest rate?’ he said: ‘I’ll tell you when I get there.’ I’d like you to prove to me that you’re much more eloquent and much more clear-thinking on this particular issue than we got from Alan.

No, sorry; I’m going to disappoint you. But I can never understand Greenspan’s kind of perspective here. My perspective is kind of diametrically opposed to it. We’re taking really important decisions on behalf of the country. They can be unpopular. They affect the distribution of income, so they’re really important decisions. And, given that, I think we need to be as accountable as we can and explain our decisions as clearly as we can and the reasons why we’re taking those decisions and the trade-offs we’re managing. So I cannot see how it can help the situation by being unclear. At various points in time, I’ve struggled to be as clear as I wanted to be, but I’ve always sought to explain things as clearly as possible. Australians should expect that of us. We take important decisions and we affect all your lives, and you have a right to know why we’re taking those decisions and how we’re managing them. In terms of the neutral real interest rate, I’m going to leave that to my successor.