Transcript of Question & Answer Session The Australian Economy and Monetary Policy

Thanks for that, Guy. I'm going to go to Innes for the first question, but just a reminder, put your questions in the Q&A box on the screen, and I'll try and get to those. And if you're from the media, some attendees say ‘anonymous’, so I really need to know if you're from the media or not. Can you just put your organisation at the start of that question? So I can preface the question with that. But, thanks very much for that, Guy, and I'll just go over to Innes now. You've got a question for the Deputy Governor, Innes?

Thank you, Tony and thank you, Guy for that presentation. These are interesting times that we live in. You described the recovery thus far as grinding, as well as gradual, and uneven. Looking at that three year horizon, particularly around bond purchases and the like, over the three years as we get into that next three years, does the pressure to look to other stimulus measures ­– the ones you talked about around quantitative easing, negative rates, et cetera, et cetera – does that pressure increase, do you believe, over time? Or, at this stage, is the outlook just to stick to the strategy we have at the moment? So I suppose as we go through this uneven recovery, one step forward, two steps back at some points, how will the pressure sort of impact on policy settings, do you believe?

Well, as I said at the end, we will see how the outlook for the Australian economy unfolds and the Board will continue to assess the merits of the various ranges of monetary options that we have. That said, as I said earlier, at the end of that three year horizon, under the central scenario, we still have an unemployment rate of seven per cent, and in all likelihood inflation a bit on the low side. So, hence the need for the Board to continue to assess the merits of the range of monetary policy options that we have available. And I suppose, as I said earlier in the talk, we decided to further expand and extend the size of the TFF at the September meeting, in part because of the recovery looking to be more protracted than previously had appeared to be the case.

Okay. Another question from Mary Thompson. How important is federal state and privately funded infrastructure investment to Australia's recovery?

It is important. I mean, I would broaden that out a little bit and say the fiscal stimulus that we're getting from the federal and state governments is very important and a reasonable chunk of that is spending on infrastructure, at both the Commonwealth and state levels. So yes, that is an important part of the support that's coming. One of the things I mentioned earlier is that I think what businesses, I mean, you're all in business, you can probably answer this better than I, but what people want to see is to get some sense around the future path of demand, and one source of that demand is infrastructure spending for a number of parts of the business community. And so having that certainty around that pipeline of investment is particularly important.

It's from [Stephen J Haller]. Given that interest rates globally are so low and that the level of government support has been so great, how can we avoid a depression like the one in the '30s? Good question.

Yeah. so far, the Australian economy has come off its trough in May. So it's plausible that the worst is behind us. But as I said, the recovery from here is potentially more of a slow grind. So, with any luck we've seen the maximum point of contraction, which in our case in total was around eight per cent. So, I think one thing we are seeing globally is extensive fiscal support. And so we aren't seeing some of the more contractionary fiscal and monetary policy action that we saw around the Great Depression. So, I think the size and rapidity of the policy response this time around has been extremely large and it has meant that we've seen less of a contraction than we might otherwise have seen and as I said, with any luck, avoiding the sort of outcomes that we saw back in the '30s.

Going back to that first chart, the Chinese chart and a few others, they talked about the Nike swish in that, that seems to go down and straight back up and that's a question from an anonymous attendee. As I mentioned before, you can put your questions in the Q&A down there. Please elaborate on why the Chinese market is the only one that has seen such a huge and quick recovery?

As I said, I think it's interesting to look at what's gone on there [in China], because you've seen the recovery in production, but you haven't seen the recovery in retail spending. In contrast here, and Innes mentioned this earlier, retail spending has actually held up – I mean, it's not even held up, it's actually grown quite strongly in Australia – in contrast, we're seeing a much more subdued recovery on the production side of things, and in part that reflects the nature of the fiscal policy support. So the bulk of the fiscal policy support here, and in many other countries, has been income support which has supported the household sector and the business sector as well.

And on the household sector side, you've seen some of that translate into higher spending, particularly in the retail sector.

In China, there hasn't been anywhere near as much income support provided to the household sector. They don't have much of a social safety net. Whereas the bulk of the support has been very much directed at production. Some part of the difference, as I said, is also timing. China started to come out of the lockdown and the restrictions on mobility much ahead of everyone else. So, their second quarter outcome is supported by the fact that they were already on the path to recovery earlier than other countries. So, some part of this we'll also just have to wait and see how things play out over the coming months.

We've got our first media question from John Kehoe at The Australian Financial Review. John asked the potential future monetary policy options you are considering. The question is about that. Is that something imminent? Or would the RBA Board prefer more time to assess the outlook for the economy?

Well, we have a meeting every month and at each meeting we continue to assess the merits of the range of monetary options to best support the economy. As I said, it's a decision that we reassess every board meeting.

Good try. Simon Roy from Amcor. What is the RBA's expectation for the economy as the variety of subsidies start to come off, the JobKeeper, the JobSeeker, mortgage delays, et cetera? Is there a risk of further downward slide and a deeper slide?

As Innes mentioned earlier, obviously we've got the budget coming up in October, so we'll have to obviously take account of what is announced there. I don't have any particular insight as to what that is going to be. It's true that some of the income support is tapering off over the coming months. That said, as I said earlier, household incomes and household cash flows have been boosted by a number of measures and particularly by the extensive income support provided to date. And the household sector has actually saved a reasonable amount of that which in aggregate at least, will give some capacity to deal with that expected taper in that degree of income support.

Our outlook does encompass what we knew in terms of policy support in August. We had taken some account of that decline in income. But as I said, it is worth bearing in mind that household balance sheets have been very much bolstered by the amount of income support to date, and business balance sheets for that matter too. That is something we will be keeping a close eye on over the coming months.

Okay, a couple here from anonymous attendees and there's quite a few coming in. We've got another 20 minutes hopefully. So the question is, has the lockdown in Queensland and Victoria, are they the main reasons why we've not experienced a V-shaped recovery? And subset of that question, is it better to not have a V-shaped recovery from the RBA's point of view?

We've got to remember, we're talking about health outcomes as well as economic outcomes here, so I'm not going to second guess anyone's assessment around that. The lockdown in Victoria certainly has had an impact on economic outcomes, that's incontrovertible. And as I said earlier, we think it's probably going to subtract a couple of percentage points off GDP in the quarter we're in currently. The appropriateness of that or not, I'll leave to others. We deal with the outcomes that we see in front of us.

And the V-shaped recovery, it's good, bad, indifferent?

I think I would've thought a V-shaped recovery is better than one which is going the opposite way.

I guess the point is, is it better to have a gradual improvement than sudden jump, is that more sustainable?

Well I mean the nature of this episode is very different from anything we've seen for 100 years basically. The economic contraction was generated by a deliberate decision to shut down parts of the economy, turn them off basically. And so in that sense the sooner, if you can turn them back on, and if that's aligned with your health objectives, then I don't see any problems created by that. The considerations really are much more around the health side. I don't see any economic problems created by that.

Okay, so this one is, I know you touched on it. This one's probably asking for an elaboration. Why would the RBA not recommend increased money supply policy for the rest of this and all of 2021?

As I said earlier, our balance sheet has expanded. It's almost doubled between March and now, and given the further expansion and the TFF we announced at the September meeting, it's going to go up a decently large amount again. So just in terms of sort of liquidity in the system, it is actually going to continue to grow over the next six months.

Okay, this one here, it's definitely worth clarifying I think given the questions, From Swati Pandey, ‘In previous speeches, Governor Lowe has indicated that negative rates was not on the table in Australia saying it was quite extraordinarily unlikely. Are you saying that negative rates are now on the table?’

No, I'm just saying it's an option. Whatever I'm saying is completely aligned with whatever Phil's said on this before. I'm just saying it is an option, and as the other three options I talked about, I'm not saying anything new about the relative likelihood of any of those.

Yes, and you did describe the value of those policies in other places. Sophia Rodrigues from the Central Bank Intel, another media question. You said, in a few weeks' time the RBA will switch the three-year yield target to April 2024 maturity. Given that April is six months away, can that be right? Does it mean your yield target would be close to 3.5 years, than three years? It's a very technical question I think.

I said in the speech, we don't have a three and a half year bond. So we have the bonds that we have and the maturity structure that they have. So I said it's the one which is closest to the three-year target, that's the target. I think I made it reasonably clear, as clear as I could, at least in the speech, that we are targeting the bond which is closest to three years, and then come about this time next month, the calendar just switches from one to the other.

I'm sure Sophia, can get that from the website, probably up after this if not already from the RBA website. So another question from the media, Pat Commins from The Australian, hi Pat. What's the risk that the tapering and eventual removal of extraordinary income support measures over coming months and into 2022, and the expiry of the deferral of interest payments for many businesses and households, derails the economic recovery? Does it raise the risk of a double-dip recession in 2022 as the sizable fiscal stimulus is removed?

Yeah, I mean as I said, I don't know the details of what the government's intending to announce in October. They are looking around and assessing fiscal policy appropriately. As I said, one thing to bear in mind is that a decently large amount of that extraordinary income support has been saved by both households and businesses for that matter, which does at least mean their balance sheets have got that extra income than they would normally have in a recession. So that needs to be taken account of as you think about the impact of that tapering. But that is something that both we and the government are going to be carefully looking at over the coming months.

So this one's from Robert Minkus. Can you go into more detail as to why intervention on keeping the Australian dollar down is not an option and what would need to change to move to intervention? Are there circumstances in Switzerland that differentiate it to Australia's situation that make it a better option to intervene in maintaining currency value?

The point I was trying to get across is that when an exchange rate is around about its fundamentals, then intervention can be challenging, particularly given the size of the FX market. That said, it is something that continues to be on the table and the lower Australian dollar is certainly beneficial to the shape of the economic recovery here and so it's something we continue to watch carefully. But as I said, the Swiss experience showed that when your exchange rate is around fundamentals then large-scale intervention, it's not entirely clear how effective that can be, but that said it is something we're continuing to watch, is the movements in the exchange rate and watch them carefully.

So this is a question from [unclear 00:15:22] and it's a big picture question. Beyond the current crisis, how do you see the long-term impact of the debt burden on the economy over the next coming decades?

As I said here, and I also said in an earlier speech, I think we've got to be careful how we think about the debt situation, particularly on the public side, in particular, in the sense that the counterfactual doesn't obviously lead to lower debt. So if there was less fiscal support, the economy would be in worse shape and potentially debt levels would be even higher. Another way of putting that is the fiscal stimulus that is in place here, and in other countries for that matter at the moment, is leading to better outcomes for the economy, which actually improves the fiscal position down the track. So I do think we've got to think about that intertemporal picture. The other point to note is with debt servicing costs as low as they are, and considerably lower than any plausible path for the nominal GDP from here, that makes the debt eminently serviceable. So I don't see it so much as it's not a burden that we're leaving to future generations. Absent the stimulus that have been put in place now those future generations will be inheriting an economy, which would be a hell of a lot worse than it would be without that stimulus.

Euan Black from The New Daily asked a question and it came in before the others so it's a similar one about the JobKeeper, weaning off. He does raise the question about zombie firms. What's the bank's view of this idea that there's a lot of companies that could potentially disappear when all the support goes?

That's something to bear in mind. That said, at the moment, I think the decision to err on the side of support is the right thing for the current circumstance. That's something to bear in mind down the track, but I think in the situation we're in at the moment, I would certainly think the right decision is to err on too much support rather than too little support and those sort of considerations would probably need to be taken into account going over the period ahead. But as I said to date, I think the main point has been to provide the appropriate degree of support for the economy.

If you think about a world where instead you've just shut down parts of the economy, I don't think today we have a great sense of what the economy will look like as we start to open up again. So I think it's possibly a little too premature to be able to say, well, this part of the economy is going to come back, this part of the economy is not going to come back as we hopefully return to something approaching a sort of pre-pandemic environment.

Okay. So this question is from our own Ai Group, Chief Economist, Julie Toth. And she says "To what extent has the growth in Australian retail spending simply displaced spending on services and particularly leisure travel services because people are staying home, going to supermarkets and Bunnings instead of restaurants and holidays?" which just comes off what you were saying.

Yeah. I wouldn't say displaced, it's being done instead of the fact that they couldn't spend on those other things. The national accounts gives you the overall story when you look at terms of what happened to aggregate consumption. So notwithstanding the fact that retail was up, consumption was actually down in total reflecting the fact that you couldn't spend on services, including some of the ones that Julie mentions. Households have got this large amount of income they've been able to spend on what they can spend. And one of the things they can spend on is retail and that's in aggregate at least been pretty strong. But you're right, there are other things that they haven't been able to spend on and the net of all of that is household incomes are up, household consumption was down and household savings are up.

So we're covering some of the same ground, but from this attendee, and I think Innes would like to add a comment to this question as well. What's the RBA's view on targeted support towards certain parts of the economy, that is tourism, aviation, education rather than the economy overall.

I think I will leave that for the fiscal policy decision makers. Our role is to provide support for the economy in aggregate and it's up to others, most obviously the government, to make the decision as to what is the appropriate way that they need to deploy their fiscal support.

Okay. Did you want to comment on that Innes or am I misreading your chat box there? Sounds not. Okay. We're getting down towards the end of the questions here so if you've got any questions, there is still a few minutes left. This question is from Craig, from Skillset. "We've seen some significant expenditure from government on job retention initiatives, JobKeeper apprentice wages, et cetera. Given the total unemployment rate is a key factor in decision making and one of the keys to economic recovery, is there an argument for more effort in terms of job creation initiatives?"

Yeah, as I said, I don't know what's coming in the budget, but from at least some of the things I read and hear in the public domain, I think there is a recognition that demand support – I mean Steve Kennedy made this point the other day – that demand support is going to be a key element of the fiscal policy support going forward. Not necessarily instead of, but certainly complementing the income support. So very much to that point, I would completely agree demand support is going to be a key element, but then that demand support coming from both the federal and the state governments, including through the sort of infrastructure stuff we were talking about earlier, but through other means of demands support. We'll see what comes to pass in October and in the subsequent state budgets as well. But yeah, demand support is going to be certainly a very important element of the fiscal policy response going forward.

And you mentioned in your address as well, that interest rates would pretty well stay … wouldn't go up until after we had full employment. Just can you remind people what full employment is because it's got various definitions.

What I said is until we get to the point where we can see inflation sustainably where we would like it within the target band, that will require a substantially lower unemployment rate. I mentioned that prior to all of this, an unemployment rate of five per cent, wasn't quite enough to get wages up. What we don't know is how the shape of the labour market's going to change as a result of all of this, but whatever it is, it's significantly lower than what the unemployment rate is now and what it is in prospect over the next few years.

Okay. This is an anonymous one that "If the June quarter was seven per cent down, what does the RBA expecting in the September quarter?"

We will update our forecasts in November, taking into account what we've learned since then. The forecast we put out in August had a minimal, barely any, or maybe even slightly negative growth in the September quarter, based on what we knew then, all of this stuff evolves pretty quickly. That did take reasonable account of the Victorian lockdown. So, as I said, I don't think I want to be too precise in terms of what our forecast is on a quarter by quarter basis. What we're more looking at is the trajectory over the next two or three years and as I said earlier, I think that's looking more like it's going to be bumpy and uneven. There'll be some ups and downs. And it looks like being more of a slow grind than a rapid return to pre-pandemic levels or growth rates.

I've got a couple of last questions there, both from media. So Michael Heath again from Bloomberg, a couple of acronyms, there: Is the expanded TFF a version of QE? Do you expect it to help restrain the A dollar?

The point I was trying to get across in the speech was that the quantitative easing and the TFF both expand a central bank's balance sheet. And so if they're of the same size, then the expansion in central bank balance sheets are the same. They work through slightly different means, but I think they share a lot of the same characteristics. As I said, one way of assessing the stance of monetary policy is to look at the size of the expansion of the central bank balance sheet and both have pretty much the same sort of impact.

Okay, and I'll just take the last question here because we're about to run out of time. Pat Commins again from The Australian. What is the RBA's bank liaison telling you about how deferred mortgages and business loans are returning to normal or being extended or restructured? Have you got any update on that?

We're actually doing a round the bank liaison right now, so I don't have the impact of that, but what we have heard is what you've heard from the various bank profit reports over the last little while, is that a number of their customers who had originally deferred, both households and businesses, have started to repay but others have taken the deferral through until next year. I would say the summary picture is we haven't seen necessarily that many more come in looking for a deferral, but we have seen some people decide to actually start making those payments again. So the number has, in net terms, has come down.

Okay. And I will just sneak one last one in from Simon. Again, Simon Roy, Amcor. Australians hold significant private debt, particularly with regard to mortgages, given the high relative house prices here. Is there any appetite to encourage US style long-term fixed mortgage instruments? So 15 or 30 year mortgages given this could provide the opportunity for consumers to lock in and guarantee very low rates for the long-term?

Yeah, that's an interesting question. One thing which is actually helping in the opposite direction at the moment is the fact that we have variable rate mortgages rather than fixed rate mortgages locked in for 30 years. So households have been able to make substantial - and they have been - making substantial, extra repayments on their mortgages as a result of the large amount of saving that they've been doing over the last few months. So if you have the standard US fixed rate mortgage, that wouldn't allow you to do that. So to some extent, at least for the time being, the households have been actually benefiting from the fact that they've got variable rate mortgages and can make the free option to repay those mortgages faster. So at least at the moment, it's actually working well. In the end, you can go ahead and we have seen more people take out fixed rate mortgages, but that's fixed for three or five years, but the share of new mortgages which have been fixed rates have actually been going up over the last few months.

Okay. That's good. Because the Americans also have the tax-deductible home loan mortgage which I think in some places that'd be very popular government policy here, I think. Innes is there now. Innes, have you got a last question or comment or wrap up?

Thanks, Tony. And thanks Guy. If I may Guy, two quick questions. One is in relation to the one that was asked before about the September GDP figure. You've talked a bit about it being a grind and others in policy making talk about this being a five year plus recovery process. Does that number for September really matter if it's in or around zero plus or minus just a little bit, does that really matter or is that more a confidence measure? And secondly, we haven't talked about the international situation at all. We've got what's going on regionally with China, we've got coronavirus, of course. We've got Brexit, which everyone seems to forget is still to be resolved. We've got the US election in six or seven weeks. The global environment is perhaps more volatile than ever. What does that volatility mean to monetary policy and thinking around monetary policy? And I guess where I'm going out of that is does the US election matter much too, when it comes to policy settings going forward?

They're all sources of uncertainty, as you said Innes. We have a lot of uncertainty. It's having an impact here and globally on investment decisions. And all of those things you mentioned are going to have an impact on investment decisions until some of that uncertainty is resolved. The US election may be resolved sooner rather than later, maybe resolved on November the third, maybe not. But those other sources of uncertainty, as you said, are going to be prevalent for a while and that uncertain environment is clearly having an impact on investment decisions here and around the world and that's something we have to take account of in our monetary policy deliberations.

On the September quarter outcome, maybe it has an impact on confidence in terms of how the number actually prints. But as I said earlier, what's going to matter is this trajectory over the next few years, I think rather than any particular outcome and particularly an outcome, which was affected in this case by a number of things, but particularly the lockdown in Victoria, which with any luck, there may be a more positive story on that in the coming weeks. But the number will be whatever it will be and we'll take account of that. But I think from our point of view, it's looking at the more medium-term picture over the next two or three years really.

Last word Innes?

Thank you. And Guy, thank you very much for joining us today. I have to say we do live in interesting times, but they're also fascinating times, and challenging times. Today you've given us a very good outlook and snapshot of where monetary policy is going, and the different instruments at play. And these are very important for those within business and in the wider community to understand as we navigate these waters ahead. So thank you very much for joining us today, Guy. Much appreciated and I appreciate your candour.

Thanks to everyone who's joined us today, including our members by the hundreds. Thank you for being with us today, much appreciated and thank you for your support. Thanks again, Guy. Thank you.

Thanks, Innes.