Transcript of Question & Answer Session Remarks to a panel discussion at the MFAA Industry Leaders Panel Forum/Lunch

Thank you Michael. The things, I guess, that are exercising my mind at the moment, there are a couple of things. The first is that – is the industry actually ready, possibly, for a period where growth in credit is no longer the 10 to 20 per cent that we've been used to in those two decades up to 2006/2007. Is the industry prepared for single digit growth in credit? And a related issue to that one is that in a way implies that growth in house prices won't actually be all that strong, certainly it won't match what we've seen over those previous couple of decades. That home equity actually allowed small businesses to fund themselves to grow. So what's the new business model in a world where small businesses, new venturers no longer have access to home equity, how is the industry going to fund these people?

Chris, Lisa started with, you know, obviously bringing home the deleveraging which is happening at the household level. That leads to a question of whether that is a good or a bad thing. Does the RBA like to see that? And yet in your opening punch it was really posing a problem for our economy in the years ahead that comes from not having a more vibrant housing market, not having more price appreciation. Does the RBA view the current level of deleveraging as a problem, as a virtue or a vice?

The way we look at things in some ways we don't look at a certain level of leverage per say as being good or bad, what we're trying to achieve actually is maximum sustainable growth. So we want growth as strong as it can be provided it's sustainable. And the way we would say well how do you measure sustainable? And for us that's actually a low inflation environment and if that actually then gives you a prism for looking at growth. So that's why the inflation-targeting framework is so important for the way we look at things. If we can get that maximum sustainable growth, let's say it's – the forecasts are around 3 per cent, the composition of that growth really doesn't – that's something that we don't have a lot of control over, because we've only got one instrument. But what we want to make sure is that as that rebalancing occurs within that 3 per cent or so, that resources can actually move between those sectors, so at one point, well it's currently – it's been mining investment, that's close to a peak and so will housing, you saw the forecasts, that's – and in a normal cycle you would actually see consumption and housing next and then followed by non-mining business investment. The important thing is that that rebalancing across the sectors can occur in a reasonably frictionless way.

But the realities of the present housing market, the low credit growth that institutions are seeing, that you mentioned yourself, is that hurting the economy at a broader level, then that further out scenario of what happens to entrepreneurs, which I will get too.

One way you could approach that question is ‘are people not getting credit who want it?’ And I guess our assessment is that credit is actually readily available for those that want credit, but the demand is not as strong as a lot of people would like.

Chris this is always a delicate area when questioning a Reserve Banker because you can't get into anything remotely like interest rate forecasting, unless you'd like to tell us.

No.

No okay. Well moving right along that deleveraging phase we're in, does the Bank have – I mean it's been there in the Minutes, it's been there in the Statements on Monetary Policy, you know, we've cut rates, we've built it, will they come? Is there a feeling within the Bank how long this cycle takes to get a little bit more active and a little bit more hairy chested in regards to borrowing?

Well if I can just clarify one point, in some ways we talk about deleveraging and in some ways we've reached a new level and that level's actually been there for four or five years. The graph you showed of the savings rate, it just says people's rate of growth of borrowings is actually matching income and they're leaving a gap. So in terms of that move from what we might call an old equilibrium to a new one, that actually finished four or five years or so ago. So it's a new world, we've had a few years where credit growth has been in the low single digits. In terms of prospects for growth, was that Michael?

Prospects for growth, the cycle picking up a little bit from its rather flat but promising hopeful strategies.

Yep, I mean you put some forecasts up there, I think they were the Treasury Budget forecasts, and that composition of growth is quite similar to the way we would think of things that – it's household spending, dwelling investment, starting to pick up if you look at, you had the numbers there, building approvals are up 20 per cent, loan approvals are up 14 per cent, if you look at the established home market auction clearance rates, turnover, there is sign of life there. That said there are differences across the regions too; I mean you have to mindful that we spend a lot of time actually looking across the regions because what one area is experiencing is not necessarily shared. So we feel reasonably confident that a recovery is under way. The question mark or the interesting area is over the non-mining business investment, but it's not unusual for that to actually lag the increases in household spending, that's because people use spare capacity before they take those investment decisions. The other thing we should probably keep in mind is if you look at the recovery in non-mining business investment compared with previous cycles, we're right in the middle of – we're stronger than the early 90s recovery and the GFC recovery, but weaker than the early 2000 and mid 96. So it looks reasonably standard if you measure the recovery from the peak in interest rates.

Before I take to the floor, my last question from up here, that question of competition, Phil raised it, you're the Head of Domestic Markets, do you think we have an optimal domestic market and competition in the housing market within the banking sector in general?

We always like competition in that market because that actually keeps prices down. The interesting development for us I guess over the past year and a half or so is actually we'd seen some signs of recovery in the residential mortgage backed securities market. There's been about $20 billion issued over the last year and a half and six billion of that's been from mortgage originators. Without wanting to get too technical some of the pricing of those junior tranches is now at a point where even the AOFM has decided that it doesn't actually need to be in that market anymore. And just to give you a quick – if you look at costs to banks of term deposits, for example, they're paying about 100 basis points over bank bills at the moment, for funding that's probably six to 12 months. Residential mortgage backed securities, which the mortgage originators like, they're paying about the same for a security that's got an average life of three, three and a half years, that's a good sign for competition.

Question?

Damien Percy, a long time listener, first time caller. Question for Chris. You mentioned the extraordinarily blunt instrument that is the cash rate and it's an interesting question, what other options should be available to the Reserve Bank? If a government were to offer the Reserve Bank the option to play with the GST as a way to adjust demand without just smashing people who hold debt, is it the sort of thing that the Reserve Bank hypothetically would be attracted too?

That's well within the realms of fiscal policy and Treasury. Fiscal policy is in some ways is about distribution and ours is about growth, so that's actually quite well delineated and should stay that way.

Could I extend that question? We've had Martin Parkinson, the Head of Treasury spell out in a couple of speeches that he thinks it's a really good idea to have fiscal contraction, that the Federal Government for one reason or another should be heading for surplus and that the job of actually running the speed of the economy should be left pretty much entirely to the Reserve Bank. Let me put it in a theoretical way so you might be able to answer it in public and that is, is monetary policy by itself the best brake and accelerator or would it be nicer to have fiscal policy happening in unison?

On a question like that, the problem is you're trying to hit multiple targets. Ours – what we are trying to do is very well defined and we will take fiscal policy as a given, just an input into that monetary policy decision.

Safely said, from the floor.

Chris not to continue the questioning same, but other than your blunt instrument for using your capacity, another one is for the granting of an Australia Post banking licence. Could you make mention of or the panel comment on how that would affect the industry if that were to be a consideration by the Government?

You're glad there's APRA aren't you?

I'm not actually familiar with the proposal at all and that would be a decision of APRA's.

Chris could I put to you that there has been an evolution in Reserve Bank policy and central bank thinking, that there was a time when central bankers around the world said you ignore asset bubbles, you just look at consumer inflation. But that's changed at the – that central banks and the Reserve Banks are more likely to lean against the housing price growth that they didn't like even if the overall inflation rate is within the band. Has there been a change in thinking at the RBA? Is that something down the track that people should be looking for?

There hasn't been a change of thinking at all, in some ways we've been very consistent right through the 2000s in that policy debate because, I don't know if you recall the Fed Chairman Greenspan was very much of this view, you don't worry about bubbles you just clean up after them. You can see what that does, so we've always said that that actually is something you need to be mindful and you may need to jump up and down ahead of that occurring because you may need to influence the way people think about these things. And Glenn Stevens in our 2012 conference was very upfront about that, that you need to take bubbles, you know, the first question always is what is a bubble, but you need to take into account asset price inflation when you look – when you make monetary policy.

But no guidance on how much housing just as an example of an asset class, by how much growth in prices would be considered too fast?

No, you're led by the data on that, and growth in the overall economy. You know we're not that good to be honest.

Is – actually putting both of your answers together, is there an argument that Australia is over mortgage brokers, that there is a rationalisation in this industry that pure brokers will do more business using technology, using social platforms, is that part of the restructuring that hey I'm a journalist if you want to talk about restructuring and doing more with less?

In some ways I think isn't the opportunity set getting bigger here? Because you've got borrowers, and I always think of small business guys who are going to need unsecured funding or – it's not a mortgage. On the other hand you've got banks who've got incredible cost pressures and it just causes them to standardise. To my mind that's ripe for an intermediary to come in and actually put those two together. You'll have to think about it a bit differently and you'll have to be innovative but it just seems to me that opportunity set is actually getting bigger over time not getting smaller.

Sorry we are right on time, but I do want to come back Chris to your opening statement. It wouldn't be like a Reserve Banker to pose a question about the next generation of entrepreneurs if you hadn't been thinking of possible answers as well. That problem of not having an easy growth in your home equity to be able to mortgage yourself and go ahead, where do you think it goes too?

Well to be honest, you know, I don't – if there was an easy answer to that, someone would have sorted it and made a business out of it. The areas where you think well there probably needs to be some innovation are probably things like in the venture capital space, intergenerational transfers, because the people who've got the home equity are the older generations so how do you actually move that from that generation to the younger generation? And the third one is basically banks will have to get – it may well be that the increase – sorry the cost of business debt goes up, because banks are doing more unsecured lending, but that means the role of the credit officer in banks becomes more – the credit officer and the broker become more important over time.

Your small business hat as well, that small business panel that you're involved in. The housing sector, possibly I think because your average journalist is broke and has a big mortgage, gets enormous coverage, gets too much political weight in the overall financial system?

The small business sector certainly doesn't get the coverage that the housing sector gets. When you think they're responsible for I think it's 47 per cent of employment and a third of value added, so if you just think of it in those terms, that surely means you have to sit up and think about that sector. And the other thing that's actually quite interesting from my perspective, small businesses are not just big businesses but in the smaller size, they don't have accountants and the like, they just want to go on making widgets doing the stuff they like. So again there's some value that can be added from someone who's got that professional expertise they can bring to the small business sector. Because the way – in some ways a lot of those small businesses think, it's just an extension of their families, you know, so decisions about whether I want to get – I want and it's for the brokers here too, do I want to get bigger or stay the same size, well I've got a few kids I want to put them through a school, so things like that actually influence the decision they take about business. And so the challenge is to think not necessarily think of small business like big business, because the motivations and the incentives are actually – can be quite different.

Is there enough happening; are the green shoots big enough in the housing sector that we don't need any further gee up of first home ownership schemes and that sort of thing? And final question really to Chris, from a policy point of view, an economic point of view, are those sort of incentives actually any bloody good anyway?

They're – just to take the last thing first, I mean someone else made the point that in some ways what they tend to do is bring things forward or they get included in prices, so you have to look at them very closely before you start offering them I think, because it's all about what you're trying to achieve. And as for what was the first bit which I'm deliberately avoiding?

I don't think you want to try to predict what a new government might do in that area.

No.