Transcript of Question & Answer Session Financial Stability in Uncertain Times

Thank you, Michele. Now, do we have any questions from anybody that we would like to ask Michele?

Michele, do you think interest rates will rise anytime soon?

I think I can quote the Governor numerous times in saying no, no time soon. I think that's his standard answer and I think you've put it very well.

Thank you. What about the financial markets? Do you have any opinion?

So the financial markets. You might recall that back in March there was a lot of disruption in the financial markets early on because it was very uncertain. They didn't know what to expect. Everyone was basically dashing for cash and that had caused problems, liquidity problems in the markets. The central banks around the world basically came in to provide liquidity and made sure that the markets could function because if the markets aren't functioning, then it's very difficult for the credit markets to function as well. If the equity markets aren't functioning, the debt markets aren't functioning, then that's going to mean that the credit, which basically greases the wheels of the economy, just seizes up. So there's still some jitters about that, but I think the central banks showed such determination to make sure that liquidity remained in the system and the markets could continue to function that I think people are reasonably confident that they will continue to do that. Having said that, that doesn't mean that there might not be periods of volatility in financial markets. I think it's possible there will be. We've seen a little bit of that in equity markets in recent days.

Will the withdrawal from people's superannuation have much effect?

It's actually only a small percentage of funds under management. So I think there's a bit of a discussion about what it might mean for people at retirement. That's a separate discussion, but in terms of the actual funds under management, it's actually only a small percentage of funds, so it's not going to impact the superannuation funds themselves. And you know, it has been very helpful to some people who really needed some money in a hurry. So you can weigh up the long-term impact of that against what people thought was a short-term need for them in this pandemic and the superannuation funds themselves remained solid.

There's a lot of talk obviously about bond buying programs and things, but no one really talks about the potential impact of that on financial stability. I mean, is the issue just that you know, the immediate need is greater than that, or is that something you factor in there as well?

So financial stability in the past where things are quite normal, is very different than it is currently where we've got no prospect of inflation for the next few years, interest rates remaining low for the next few years. So I think this is a very different circumstance and when you look at balancing the relativities between the risks, the risks are very different this time around. What we're doing now is we've got a situation where we've got resilient banks, we've got some vulnerabilities which will be exacerbated by the economy and the main thing is to get the economy moving.

Do you think the bank lending criteria will ease up or tighten up as we move out of the process of the pandemic, which can be, you know, crippling small business, expanding, moving forward while there's the availability of the low rates that are out there?

Yeah, it's a very good question. Finance in normal times for small businesses is not necessarily easy … We're hearing a little bit from liaison that banks are willing to finance existing small business customers, but they're a little bit wary about taking on new ones because they don't know as much about them perhaps. But a couple of points that are positive, I think. One is that the small business growth fund, the government has got that off the ground now. The idea is a bit of equity investment in small business, which might help. I think the banks do have the ability to continue to fund small business. I think they can't use the excuse that they don't have capital to do that, so we will be continuing to encourage them to do that.

And at the margin, it might be that the removal of the responsible lending obligations in their current form might ease things up a little as well, because we were hearing reports that there was a little bit of confusion about how you treat small businesses. Do you have to treat them according to responsible lending obligations? The answer was no, but I think banks were a little bit confused about how they dealt with that, particularly where small business finances and household finances might've been quite interlinked. So that might help a little bit at the margin as well. I think what you'll see is that it might get a little bit more difficult, but banks are going to be getting lots of encouragement to continue lending to small businesses.

Michele will interest rates drop? Can they go any lower?

I'm not going to answer that. What I'm going to say is that my bosses, in particular Guy Debelle, the Deputy Governor, gave a talk the other day in which he set out a number of options, a number of things that could be done, one of which was possible further lowering of interest rates. He didn't give one way or the other, but he did give some ideas about what might be done in addition, and one of those options was in fact, a bit further of a fall in interest rates. But I recommend his speech to you.

Michele, one last one, sorry. Just on Victoria, in your speech, you mentioned that I think it was about a quarter of businesses that are on JobSeeker might not be viable without support. Do you have any numbers on Victoria on what the situation is there or is it too early? You have to wait until the economy opens up?

No … the ABS, the Australian Bureau of Statistics, has been doing little ad hoc surveys and one of the surveys they did was businesses and 25% of businesses that are currently receiving support said if they remove the support now and the economy wasn't moving again, then they would fail. So, it's quite a specific circumstance. We don't have any specific regional breakdown on that. All we have is just, because it's not a very big sample, but that's all we've got.

Nothing from liaison though?

No, nothing as specific as that from liaison. But … what we can say, I think, from the information we've got is that the income support coming from the government for small businesses has been crucial in keeping their cash flow going, keeping their buffers, cash buffers up. So, if that support gets removed and the economy isn't moving, then you would expect to see an increase in business failures.

Has anyone got any other questions?

Well, from what I can gather, we are in a pretty strong position here in Australia. So it shouldn't take that long for us to recover. Is that correct?

Well, I'm not I'm not in the business of forecasting and in fact, towards the end of next week, the Bank will release some more forecasts. But the words that people tend to use are uneven, uncertain, and it's probably going to be a bumpy ride, even in Australia. There are certain signs that things are recovering, but it's going to be a bumpy ride.