Transcript of Question & Answer Session Remarks to the American Chamber of Commerce in Australia (AMCHAM)

Governor, can I start with the triple A credit rating that Australia has. In December, you warned, I think, that the triple A rating could be threatened if longer term tax and spending issues weren't fixed. Are you more or less confident about our ability to maintain the triple A rating?

Well Ticky, I don't think I talked specifically about the rating. I probably was interpreted as having done so, but the point I was trying to make was that we don't have a budgetary crisis at the moment. What we have at the moment in fact is remarkably benign conditions for government borrowing. Our government and indeed the governments of most countries are borrowing as cheaply as has ever been seen … ever … and the Commonwealth of Australia can borrow more cheaply today than any time since Federation.

But does a triple A rating matter?

But – well it does matter – but my point is, and this is, you know, people like Martin Parkinson have talked about this. Ken Henry talked about it before him. John Fraser is talking about it too. We're not on the correct path for the long run and we need to get onto a better path, I think, during benign times so that when not-so-benign times come we're more resilient. I don't know when those times will come, but sooner or later they will and my point is we should be taking early, measured steps that will build up in their effect over the long term so that we sustain the position of strength we have. The triple A rating doesn't matter. Well, it matters in a funding cost sense: the difference between triple A and double A plus is not large, but I think people with experience in this area would say that if you move down to one below that's actually probably because you're on the path that doesn't stop there. And you don't want to be on that path, that's the point.

You said that if there was a downturn, potentially you could go from 2 per cent of GDP to 5 or 6 percent of GDP budget deficit in a heartbeat. Does the way we're going give sufficient policy flexibility to respond to other shocks?

Well, I think if, God forbid, a large negative shock came along right now we still have macroeconomic scope to respond to that. With the budget though, what you would find is a deficit that's at 3 per cent of GDP roughly now, it would be at 5 or 6 or 7 very quickly if we had a significant recession. And if you were then thinking well we'd like to do some discretionary stimulus on top of that, then you're talking about pretty big deficits. And I think you'd be in a better position to have the fire power for that discretion because, bear in mind when you go into a downturn, the deficit gets bigger anyway while the government does nothing because of the so called ‘automatic stabilisers’. And that's appropriate, it's appropriate that the system has that design feature, but if you're then thinking we'd like to give some discretionary stimulus on top of that, the scope to do that's not looking as great as you might hope if the deficit has already gone to 5 or 6 per cent of GDP. I think capital markets would ask a few more awkward questions of us than they have in recent years in that sort of environment.

Let's move to rates. You talked a little bit about, you know, the thinking behind a possible lowering of rates I think just now, I'd like to ask you what is the evidence that rates at the level that they are, which you said are low at 2.25 per cent, are holding the economy back.

A very fine question and one that I've asked myself. I don't think, personally, that the current level of interest rates is really the main thing holding back the economy. I think anybody who's creditworthy can get credit very cheaply at present. Banks are willing to lend, they are a fair bit more discerning on risk metrics than they were six or seven years ago, but that's good. Even so

they're willing to lend. The fact that it isn't interest rates holding things back isn't the same thing as saying that there's no benefit from lowering them. There might be, but that of course is something that we debate each month and I'm not here to give a particular steer on forthcoming decisions obviously.

You tailored your speech to America and Australia, of course we had - - -

Well it is AMCHAM after all.

It is AMCHAM. We had Janet Yellen's comments about ‘just because we've removed patient it doesn't mean to say we're going to be impatient’. The markets, I think, interpreted that as a September rate rise is more likely than a June one. What difference does a later rate lift in the US rather than an earlier one make to your deliberations?

I'm not sure that it makes a major difference, time will tell. Financial market pricing, in fact, was already a little bit closer to September than June, in my reading of it. So in a sense I think the Fed's language and positioning has moved a little bit towards where the market might already have been. It still seems the most likely outcome, I would say, based on what they've said, what market pricing is, how the US economy is travelling, the most likely outcome is the Fed's funds rate will start to rise sometime this year but I think it will be quite a gradual rise. I've always thought that was the most likely outcome, very gradually.

So you don't necessarily, do you agree with Roger Corbett, the RBA board member's comments the other day, where he said he was not sure, because it's always a little bit different when rates do start rising quite what will happen whether there might be concern.

Well I think that's correct, because as I said in the prepared remarks, even though this is probably going to be the most telegraphed interest rate change in the history of the Fed, there still is a slight unknown quantity once the action comes. It's nine years since they last did this. Which means there's quite a few people in financial markets today who've never lived through a Fed rate rise cycle. So they've read about it but they haven't lived through it. There will doubtless be some disruption and there always is when the Fed starts to change.

Now Governor, one of the other consequences of course of lowering rates is that it is injecting risk into the economy, and not the sort that you might like, particularly boosting the share market and the property market. By lowering rates aren't you encouraging a self-funded retiree or even a pensioner to take money out of savings and put it into one of the big banks right now?

Well part of the way monetary policy works is, when you're easing you lower the return on the zero risk or very low risk assets, that's part of the transmission mechanism, it always has been. The question is, and this is a question for central banks really right around the world, including for us, the question is how much of the real economy risk-taking by the entrepreneurs that I was just talking about, how much more of that you get at the end of this chain of causation and that's it's harder to save. And one would have to say, I think, that at this point in time the evidence for much more of that risk-taking globally is not that strong. The US would probably be the main exception. I think they've got a plausible story that says what the Fed has done has eventually led to more real economy risk taking.

But are the issues of the housing market, particularly in Sydney, featuring more in your thinking now or are you still thinking?

They've always featured in our thinking, because monetary policy works partly through this channel, there are other channels as well, but one of the channels is it prompts changes in financial risk taking behaviour, that's part of how it works. And it works through asset markets and credit conditions and credit growth. That's part of how it works. So we're always looking at what's happening to those parts of the system, because that's one of the things that we look at to see ‘is it working or not’.

You said before Christmas that you'd prefer to see an Aussie dollar closer to 75 US cents, we're almost there. But most currencies have dropped against the US dollar and our commodity prices, iron ore $55, have dropped. What level of Australian dollar would you be comfortable with now?

Well we're not here to kind of nominate some new target today. I think …

But has it changed, I mean has that changed?

Well, I'd say the exchange rate's adjusting, possibly a little bit belatedly compared to what I might have at one stage thought likely. None-the-less when it was the 90s we were saying ‘look, we think people are underestimating the likelihood of a significant decline’. I think we were right to say that.

But you mentioned the terms of the trade issue.

There has been a significant decline, this is an adjustment that is probably not yet finished, would be my guess.

And that would be a good thing?

Well, it is part of the adjustment mechanism, it always has been, since we've been floating anyway.

I mean, there is a growing, I think, speculation out there, or belief out there, that really the lowering of these interest rates by the RBA is more about pulling the dollar down and that we are now getting involved in currency wars.

I don't think the term currency wars was ever a very helpful description. I can remember being in the meeting where I think it was coined, by the Minister of Finance from Brazil and I can understand why he thought of things in those terms, but it's not very helpful to characterise countries that are supposed to be engaged in international co-operation as being at war with each other over currencies. The fact is currencies float, most of them, they adjust in response to differences in economic conditions, differences in rates of return across assets, changes in risk perception and what have you and that's what it's doing, it's doing what it's supposed to do. And I think we should be content that the floating currency, which has served us well for more than 30 years continues to do so.

Governor, I'd like to thank you very much for indulging me. I'd like to now open to the floor any questions out there: we have a couple of roving mikes, please if you could state your name and where you are from and can we give me the lights at back, over there thank you.

Sorry, Tim Lamb, Trumpet Capital. Glenn, in regard to rates, in 07/08 you raised significantly, in 09/10 you cut, then you raised again through 11, now you've cut, waited and then cut again. I mean, are we going to see a reversal come November?

Well, I don't know and if I did know I'm not allowed to say and if I tell you I have to shoot you, I think they're the rules. Interest rates will be adjusted as needed to deliver as best we can the results that are our objectives and right now the prevailing question is ‘should they stay here or go down some more?’ It's been quite a while since we last increased them, I think that was 2010 actually and they started to come down in 2011. So, you know, it depends on what happens is the answer. There's one at the front.

Thank you. Richard Gluyas from The Australian. Governor, there's been some discussion recently about how the country might benefit from using good debt for infrastructure investment. It was mentioned most recently by Rob Whitfield from Westpac, I was just hoping to get your thoughts on using good debt to invest in productive infrastructure and how that might fit in with the political narrative that's going on at the moment.

Well, I'm not going to attempt to weigh into the political narrative. On the question of infrastructure and debt, I think in-principle there's nothing wrong with debt against long lived assets. And in fact I suspect you will find that private sector holders of long lived assets will have some long duration debt against that, that's perfectly fine. Really though, on infrastructure in Australia the problem isn't finding the money. You could argue about whether the government can find it or whether they could sell other assets to fund it. In a sense either of those is a funding decision really, and economically they're not that different. Or maybe the private sector could come up with the money. Funding it isn't the problem. The problem with doing infrastructure, the issues with doing infrastructure are governance, making sure you chose the right projects and having a proper process of evaluation, optimal risk sharing, because there are some risks that the government is probably better placed to bear than the private sector at some points in the project. And then the private sector is better at bearing other sorts of risk, so risk sharing, and then pricing the use of the infrastructure once it's in place so that there's (a) an appropriate price signal to the user and (b) the stream of revenue that makes this asset so attractive for a superannuation fund or whoever to hold. And to me, and this is something that came through very strongly in the infrastructure work stream that we had in the G20 last year, that was put onto the table by our Treasurer. If you can sort out the governance, the risk sharing and the pricing, the funding isn't really the problem.

Governor, when I worked for your organisation many years ago we often used to think about monetary policy in a ‘path of least regret’ type framework, so I'm wondering and given that you've mentioned that the RBA is willing to support the economic transition that needs to occur, what would prevent you from cutting rates further, what are the risks associated with that?

Well, yes it's a ‘path of least regret’ framework, I think is still useful. And that framework tells you that growth's on the low side, it's not too bad, but it's not as good as we could do. Inflation is low, it's probably going to be okay, we're unlikely to have a problem with excessive inflation and it's a world of very low rates, interest rates should be low. They should be quite low, well they are, and really the debate at the margin is: should they be a little bit lower or not? Let's not forget where the level is. But I'm not here to you know offer steering on the next decision or two, the Board will meet and make up its mind and you'll no doubt cover it in great detail, whatever we decide, but the framework is telling us to do roughly what we've been doing.

Good afternoon, Wolf Barner from DB Schenker, I'm no economist, but putting aside monetary policy and interest rates. One fact that I feel needs more discussion in this country is productivity and certainly you're talking about risk-taking entrepreneurs wanting to invest money into businesses employing people. I do feel the some major stimulus to facilitate that next wave of risk-taking and, you know, employment growth again, but the basis of that will certainly be an improved productivity platform, both in the products and the services sector. What is your view on that?

I couldn't agree more, but the instrument that I'm responsible for setting has basically no effect on productivity in any direct fashion. I've talked a lot about productivity myself and its noticeable actually that in many audiences I'm asked what do we do about productivity and the answer I've been giving for several years is there's a body called the Productivity Commission. They've published forests worth of papers on this, there's a list of things there, let's get the list. And at that point there's a lot of nervous shuffling of feet and looking at the floor, because the thing on that list for the political process are very demanding, they're very hard to do, they're politically costly and they naturally tend to shy away from them. None-the-less. the Productivity Commission is the experts, they've got I don't know how many PhDs working on this and they're the guys to ask about how to get productivity. And it's opening markets, which we really haven't fully completed, enabling flexibility, capabilities, all those things and Garry Banks gave a superb speech when he finished as Chair of the PC, it's all there.

Yes sir.

Hi Mr Stevens, John Durie from The Australian. If I could take you back to your interest rate decision last month where you cut rates you had put on record the prior year that you weren't going to cut rates without changing the words in your monetary statement and yet you disregarded that. And you also, prior to that there was some publication of some very timely figures which sort of pointed to your direction, both of which upset the markets a bit and they thought they were taken by surprise and thought that maybe you'd shot yourself in the foot a bit with the way you made the change, could you comment on that please?

Well, firstly nobody has the right to be surprised in financial markets, there are going to be surprises from time to time and that's never going to change. Secondly, on the language, it was obvious to me very soon after we started talking using the ‘period of stability’ language that eventually that would be a problem. Bear in mind that the whole point of that language when we first started to use it, about two years ago, was the moment we signal ‘look we've been cutting rates but we're going to sit now’. In this country the tendency is for the media and the markets to immediately rush to the other side of the boat and say ‘well now if they're not cutting they will be increasing’. And we weren't even thinking of increasing and we wanted to try to resist the tendency for the market to price rate rises in 2014. It didn't stop plenty of people speculating about them anyway because it doesn't matter how clearly you say it, there are still some people who want to run with that speculation. But that was the purpose of the stability language and I always knew that sooner or later that language itself, and any possible change in it, is going to be potential problem. That's just the way it is. With any kind of language, as you can see with the intense debate over the past few months, over one single word in America, the word ‘patient’ and ‘would it be there? And when will it be taken out? And what will that mean?’ So the use of any particular language is fraught with danger and difficulty. That is just in the nature of things and there was always going to come a moment when we were either going to change the language and that would have been a huge kerfuffle in markets, or actually change the rate, either way some people were going to be surprised by either of those events, and so it proved to be. But, you know, if it's the right thing to do, to adjust the rates, then it's the right thing to do, even if it's a bit of a surprise. On the issue of how big a surprise is it, well I would simply note that as early as Christmas there were some people, not the majority, but there were some, openly speculating that rates would start to come down again in the early part of this year. There were a few more of them by February, and, you know, I just don't think you could claim, and you're not claiming, but no-one could claim, that somehow this came from nowhere, completely out of the blue. There was always some possibility of it happening by the time we got to the February meeting and then it was a matter, from our point of view, of timing. And I think the minutes of the February meeting made that pretty clear, so that's what I have to say about those matters.

Yes sir.

Governor it's Ben Potter from The Australian Financial Review. Is now the time for a dull budget and what in your view would be the consequences of Australian Commonwealth debt going to 60 per cent of GDP in the coming years as has been discussed in Canberra in the last few days. Thank you.

Well actually the figure of 60 per cent of GDP, that was quoted and which featured on the front page of your journal yesterday, that is a projection that the GDP in the year 2054/55, 40 years from now. It was not a figure that anybody was proposing was going to be seen any time soon. I think that bit of context is worth stressing. Whether the budget … well I don't really give gratuitous public advice about fiscal policy. What I've said about the budget accounts for the long run and the things I said to Ticky earlier today, and I've said on other occasions, we are on a path which is not terribly damaging to us in any near term horizon, but it's not a path we really should be on over the medium term and it would be wise for us to do what we can in a measured and early way to get on to a better track. And I think fiscal policy this year, next year, the year after and so on should be framed with that in mind.

Governor Stevens, Peter Ryan from the ABC. I think the afternoon after the February rate cut you briefed federal cabinet or you had a briefing with federal cabinet and I was wondering if you might be able to let us know what you're impressions of federal cabinet were and whether or not these type of briefings are going to be commonplace while you're still Governor thank you?

Well it would be completely inappropriate for me to convey anything about the details of a meeting in the cabinet room because what happens in the cabinet room is supposed to stay in the cabinet room and certainly whatever is said about won't come from me. I was asked to go and brief them on the economy. I did that. How regular or otherwise, I mean they haven't been a frequent occurrence in my time, whether or not it happens again, and if, so on what frequency would be entirely a matter for the Prime Minister.

Time for one last question or two. One over there.

Thank you Governor Stevens, John Richardson. Australia hosted the G20 Summit process last year and I very much welcome your comments on the progress that you see has been made to the reform of the international financial system, the reform of the IMF, the World Bank and also moves to harmonise or to avoid tax minimisation across the major jurisdictions. Thank you.

I couldn't hear that question very well but I think it was about G20 and international financial reform. That's what I'm going to answer anyway. The Financial Stability Board, which is the co-ordinating body charged with trying to help the various standard setters move to the new, the revised regulatory arrangements in a more or less co-ordinated way is working very hard. The key themes that were to be delivered last year in our G20 year were – were making progress on derivatives reform, there's a proposal for total loss absorbing capacity for the globally systemic banks on the table, Basel III implementations proceeding and so on. This set of work streams is extremely demanding and the global regulatory community is working extremely hard on it. There's a long way to go. It's important, I think, that we keep our eyes on the main prize and not bring in too many additional regulatory items onto the agenda simply because we are running flat out to deliver what we've committed, but I would remain confident that we'll end up in the right place in a few years' time.