Transcript of Question & Answer Session Economic Conditions and Prospects

Look there’s been a lot of discussion at the moment as you’re well aware about reinventing the GST wheel as a way of I suppose stemming the revenue losses to states and territories that’s come about from this online revolution we’re in. Given the Reserve Bank has the responsibility for overseeing the payment system, can we talk a little bit about the threats that you see to our regulated payment system when you can buy and pay over the internet for services that produce no revenue and pay no tax in Australia, including GST, and don’t use the Australian payment and clearing system.

Well I don’t want to get into tax matters, that’s a set of issues as under careful consideration in the places where they know about tax and that’s outside my field. On the payment system, actually when you make payments online offshore, there is still an Australian payment system linked there because ultimately the money’s coming out of a bank account, your bank is processing that, the credit card companies are processing it and so on. So our responsibility is safety, reliability, efficiency, competitiveness of the payment system and I think from that perspective what we’re seeing is increasing prospective competition for the established players in that space. Now we need to be sure that the competition doesn’t undermine standards of security and safety, but provided we can maintain that actually some competition in the payment space is probably from a consumer point of view to be welcomed per say. That doesn’t take away from the difficulties of the GST not applying on certain imported things and so on, but as I say that’s properly considered I think in Canberra, not in Martin Place.

Do you think though that we’re far away from that concept of having an essentially cashless society, and will the price of that convenience be too high in terms of what you’re talking about, in terms of control and privacy?

It’s an interesting question whether we’re moving to a cashless society, people have talked about that for a very long time, and unquestionably the electronic methods of payment are growing in their penetration of the system and their convenience. It remains the case though, thus far and this may surprise you, that the demand for the folding stuff, which of course is our product.

Do you have any you wanted to give me at all today, I was just curious?

I don’t get free samples so I can’t …

And the one perk I thought I’d get today is dashed.

I sit there and sign them all day.

It’s a very nice signature, if I could forge it I would.

The demand for notes rises about 5 per cent or 6 per cent a year very consistently, it still is growing at about that pace, so there is $60 billion of that out there, circulating around, and so far we don’t see a major impact on that demand from electronic payments. It’s likely eventually I guess that we will, but so far cash seems to be still a pretty useful payment device for many purposes.

King as they say in the classics. Well let’s go global, you did wet our appetite with a lot G20 talk and we’re a big fish in the G20 sea this year, so the RBA though represents Australia on the Financial Stability Board, and we’ve seen some stability returning to Northern America and parts of Europe. But Russia, to use an oldie but a goodie from Paul Keating, they seem a tad recalcitrant. What’s the Reserve Bank thoughts on the havoc that the situation with Russia and the Ukraine is causing and what effect might that have on Europe and Australia?

The principle effects I suspect still will lie in the geopolitical military space about which I’m not competent to offer an opinion. I think economically so far there hasn’t been huge disruption globally in financial markets would be my assessment. The Ukrainian financial system and the Russian have both come under some pressure but that hasn’t really spread too far beyond those borders and so I think at this point, I don’t see a material threat crystallising financially or economically from that source, I think the issues are more political and strategic.

You did mention in your speech too that the position on unemployment and it is an increasingly hot topic, I mean 500 jobs lost here just yesterday in Brisbane when the BP oil refinery closed. It seems that we’re in line for a relatively, by Australian standards at least, high unemployment rate over the next few years, is that inevitable or do you think these demographic factors …

Look I don’t think these things are inevitable and actually the unemployment rate we have right now of about 6 per cent and we think it probably will go up a little bit further yet. That’s certainly higher than we want to see, but over the long run of history actually that’s not a high number, I mean a seriously high unemployment rate in the past has been 10 or 11 per cent, as I was quoting in the talk, so it’s important I think to keep some perspective there and to remember that yes the economy is adjusting, some jobs are being shed, and that’s no doubt unquestionably difficult for those communities, fully agree with that, but jobs can grow elsewhere and if we have overall macroeconomic stability, which is what we’re trying to deliver and a sensible range of policies in other fields and for the business community and the labour market and so on, you can grow jobs we have done in the past and we will again.

More PR people and economists would be a good start I would think.

I’m not sure whether more economists would be universally welcome.

Well we PR people are very popular. Look a lot of tough Federal Budget talk going on and you did mention that briefly with Treasury Secretary Martin Parkinson quoted as saying Australia must be prepared for a recession in the next decade, I mean your thoughts on the R word?

Well, the history is recessions come because economies have cycles. We’ve built this little, slight fairy tale that we haven’t had one for 22 years, 23 years. I myself think we’ve had a couple of episodes of slowdown that, but for the accident of the quarterly national accounts might have been labelled recessions, but they were small ones and the point here is market economies have recessions. A recession is a period where activity goes down briefly, usually for six months to a year, and then you grow again, no one can promise that there won’t be recessions in the future, there will be, I could virtually promise you I think that someday out there, there’ll be one, I can’t tell you when or why, but if you look at the history of any market economy they happen. So the notion that you will always avoid them I think is setting yourself up for disappointment, the trick is, to be in such a situation that when the downturns comes, they’re small and brief. And so the downturn we had at the end of 2008, the one we had in the end of 2000, early 2001, on some metrics you might call those recessions but very shallow ones, brief ones, and quite quickly we were back to growth and hence today our economy is 13 per cent I think it is larger than in 2008 whereas the British economy is still smaller than it was then, so it wasn’t just the depth of the downturn it’s how slow the recovery is that also matters. So I think recessions are a feature of market economies, they happen, they will in the future as they have in the past, but good policy should be able to have us in a position where they’re not really deep ones and debilitating ones, they’re brief ones, and if we could achieve that, that would be no small achievement.

You also, earlier I was telling a few people, and there are indeed a lot of cranky bankers out there, I don’t know if you noticed, but they’re cranky, they’re cranky about you know the new capital regulations under Basel III, and they’re saying they’re too restrictive and in terms of Australia we already have incredibly strong bank regulations via the good RBA and APRA, so in your view do you think we’re paying the price for other nations for their lack of self control really?

No I don’t think so, I think those countries have been paying a very high price for the various things that went wrong and there’d be discussion over the question of whether the bankers and other participants were more at fault, whether the regulators had failures and I don’t want to get into that, but financial crises are extremely costly. You’re talking about tens of percentage points of GDP cost to the community in lost income and budget support and so on, that is a massive amount. The likely cost of slightly higher capital, an additional margin for safety for banks like ours is miniscule in comparison to the thing that you’re trying to avoid. So I think what APRA’s doing is they’re implementing the international standards, and it’s true that they’re implementing some of them a bit quicker than some of the others are, but that’s basically because the others can’t implement them at the same speed, they’re not starting from the same strong position, we are starting from a strong position and it’s I think an advantage to our system to be able to say look we’re there quickly and I don’t think it’s all that hard to get to where they need to be, to be honest with you. So we support the implementation of Basel, there are certainly things that have come forth in the international regulatory agenda that we have to some extent argued against from our own position, but by enlarge a country of our size, you can’t realistically say well I’m not going to do this, just go my own way, that’s not feasible.

The rising level of concern that you’ve indicated a couple of times now in other speeches and again to some degree today about house prices, is that really just a market catch up after some years of stagnation do you think or should banks and Government be concerned when interest rates as they are setting sometime in the future are likely to see a lot of defaults because they had that low interest credit.

Well I think the key thing here is there are two things there, there’s house prices per say and our message is that people should remember prices can fall as well as they don’t just rise they fall sometimes and they have in this city, and in Sydney a couple of times in the past decade there’s been a period where prices went down; so it’s not a sure bet that’s the first thing. And the second thing is that credit quality in the future when one day interest rates are higher than the low levels we have today, that’s really about the quality of lending decisions that banks make, and our message to them, and I think that there’s not much evidence at this point that lending standards have deteriorated materially, but our message and I know that APRA is giving this message very clearly to the banks, is don’t lower the standards.

Things like 30 year fixed mortgage terms are available in the States but not in Australia.

Well they are but, I mean that term part of our yield curve is not sufficiently developed to really allow the financial institutions to price a loan to you for that long, you can’t get out that far. The fact is most people still take floating rates here anyway, but we don’t have a 30 year, a mature 30 year part of the yield curve sufficiently to allow the lenders to raise money and do all the appropriate hedging and so on they need to do, to offer that product.

You mentioned before how tough it is for regulators and governments to look past and have that grand plan that grand vision be bold about what we need for the future, do you have hope that we’re going to get to that point any time in the next decade or so.

That’s a pretty big question, but I think from the little narrow world of the Reserve Bank we’ve got a clear policy framework that I think’s worked very well for 20 years and it’s strongly supported in the financial community and in the political community, so that’s good. Some of the challenges that we have around ageing fiscal and so on these are things that require I think a lot of discussion in the community at large and they have to go beyond just occasional sound bites, there’s got to be serious discussion that’s a difficult task.

And sometimes unpopular.

And that is the job of the political leadership and I think they’re acutely conscious of that, so we can only I think give them our encouragement and good will to do that.