Transcript of Question & Answer Session Monetary Policy in 2020

Thanks Guy. I think a very thorough and well-timed summary of the Bank's actions this year. Certainly, it's been an extraordinary year, so thank you for that. So, as I mentioned at the outset, Guy is going to take some questions from the audience. I notice we've got a few already. But, Guy, I'm going to ask you a personal question up front: I was at Governor Lowe's speech last week and he was asked about when was the moment this year when he really realised this would be serious. He nominated when he was at the G20 meeting in Saudi Arabia. So, I'm going to ask you the same question: When did you realise the seriousness of this crisis?

The question has already been answered for me, right?

Well, you could have a different answer.

At the same time, I think. Really, that was when it became clear that it was much more pervasive sometime around about then. I can't remember exactly. It's a bit like the financial crisis, although even more recent this time, there is a still a bit of a blur, that period. Sometime around about that point. Certainly, just prior, which was not far before we had our Board meeting in the middle of March.

A question from Justin Fabo from Macquarie Bank. So, what probability would you put on a risk of an extended period of strong asset/housing price growth? You mentioned that during your speech, given the guidance that you've given again today that interest rates won't be going anywhere for quite an extended period of time.

Thanks Justin. There are a few dynamics going on in the housing market at the moment. It's quite different across the different parts of the market; both in terms of higher density versus detached and also around different parts of the country. Some of the developments are affected by the government support that's been provided too. In higher density stuff, there is quite a bit of supply coming on the market and a decent chunk of people who would have otherwise occupied that, aren't turning up. A fair chunk of that market was, at least in aggregate, was to students and Airbnb or short term business visitors and the like, and they aren't here.

So, we've got much lower population growth over the next couple of years than would have been factored into people's assessments when they were building those places. So, the dynamics there, in the short term at least, there is more supply coming on the market and not a hell of a lot of people to live in it. Or if they live in that, then the places they're moving out of are going to find it hard to find someone to fill those places. And so we've seen a decline in rent. So the investor part of the market, particularly in the medium high density side of things is quite soft.

On the other side of the equation, the detached market is actually doing pretty well. Now, living on the outskirts of big cities is a good thing rather than a bad thing, and so the demand for that is quite reasonable. So we're seeing these different dynamics across the country. But given the underlying supply/demand dynamics, I don't see it being too much pressure on house prices in the short term.

If I look at equity prices, they've gone up here but not as much as they have, say, in places like the US. Then, there's also the question if you're in an environment where interest rates are structurally low for a long period of time, and we've been in that environment for a while, but it looks like we're staying in it for a while yet, then in that world you would expect asset prices to be higher. So yes, we've moved the policy rate lower but some of that reflects structural factors which are going to be with us for a long period of time and which would underpin higher asset prices.

Thanks, Guy. Another question here from Diana Mousina from AMP Capital. What else do you think the Australian government should do in terms of policies, if anything, to assist the domestic recovery?

Well, the government has just announced their budget in October. You guys, New South Wales' government, have only just announced their budget in the past week and the Victorians have only announced their budget today. So, I think let's see what happens from what's been announced first before we start worrying about what more should be done. As I said, a lot of this stuff has just been announced recently; we'll just have to see how that takes effect, but also how the economy evolves because there‘s still a large amount of uncertainty, in both directions, around the outlook for the economy.

Thank you. There has been a couple of questions about the legislated increase in the compulsory super guarantee. For those of you who saw Paul Keating on 7.30 last night, there was quite an animated discussion. I know that your boss has a view on this, I'm wondering what your view is. Do you share his view about …?

I don't think I need to jump into this debate. I think there are more than enough participants in this debate at the moment.

There's a question from Danny Davis. What do you see as the Reserve Bank's role in the recovery beyond the usual levers in lifting systemic capacity, productivity and resilience? I'm sort of guessing, I know what your answer is going to be is: that's a matter for government. But perhaps I'll put out there anyway.

I'm not quite sure what role there is for us beyond, we're doing what we can to provide support for the recovery as it takes hold. But, there are only so many things we can do in that space. I think we are doing what we can do in that space. But I'm not sure there's much further role for us to do any more than what we already are doing.

Fair enough. There's a question here from Patrick Commins, Journalist. How important to the recovery is the announcement that the Queensland border will re-open to Sydney and Victoria from 1 December?

I don't know. I think it does open up more opportunities. I'm just not sure I could put a number on it. It allows, I would say, people in far north Queensland are probably fairly happy about the prospects of, at least, domestic Australian tourists being able to get up there now, which would have been somewhat constrained before now. So at least for some of those communities I would say it would be pretty beneficial. I mean, the flow of goods has been, by and large, not too affected. It's really been travel and tourism and service flows which have been the ones that have been most disrupted by the state border closures. As I said the goods cross-border flow has not been too disrupted.

Okay, thank you. I've had a question sent through separately by text, so I'll ask that one, it's from a journalist: Hypothetically, if government bond yields around the world were to, say, double next year from the current levels, particularly in the US and normalisation of economic growth as vaccines control COVID, what would be the RBA's preference in terms of extending or increasing its bond buying at the long end? Or would it prefer, simply, to maintain the three-year bond type?

So, if the economic outlook changes then that changes our assessment of the appropriate stance of monetary policy. But I think we've got to wait and see whether the economic outlook changes. The bond yield target is focused on the three-year point to keep borrowing costs low because most of our borrowing rates in the Australian economy, as I talked about earlier in the speech, are anchored around that. Much less keys off the longer end of the curve beyond, obviously, the borrowing rates of the federal and state governments.

Thank you. There is a question here from Tapas Strickland at NAB. You mentioned in your speech about in a crisis go fast, go hard, don't die wondering. Another lesson from the GFC, perhaps, was not withdrawing stimulus too early, which you mentioned. What's your view on balancing the risks of keeping policy too low for too long against committing to the forward guidance, e.g. the three-year yield curve control.

I've lost the last bit of the question, can you repeat that?

Yeah, sorry. What is your view on balancing the risks from keeping policy too low for too long against committing to forward guidance?

Over the horizon we're looking, we don't see much of a risk of having inflation too high or unemployment too low. So, I don't see that there is a much of a risk, at least confining my remarks purely to monetary policy, too much of a risk of that in the foreseeable future. I just don't see over the three-year horizon that we've got any degree of confidence.

Okay. Your boss again has been quoted several times, and you probably have as well, Guy, about negative interest rates in Australia being extraordinarily unlikely. Why is the Bank so committed to not having negative interest rates? Is the reason unique to the Australian banking system? Governor Lowe mentioned a couple of reasons last week, but I'm just curious about your thoughts on that.

I know there is some research out there which shows that they're effective. I don't find that research overly convincing. At least talking to some of my colleagues in other central banks about some of the research that they're doing and some of things that they're seeing, which is not in the public domain, and I concede that, but at least I put some weight on what they tell me, is that they don't see that they're being overly effective. I do know that there's some literature out there which says that they are effective, but I find, certainly in terms of supporting the flow of credit, I don't find the evidence all that convincing in talking to some of my counterparts. They also note the behaviour of some parts of their household sector in terms of saving more, rather than saving less, because of the lower rate of return on savings. Now, from a theoretical point of view, you might say that that's not sensible, but that is what happens. Or that is what is happening in some of these other jurisdictions. So at least, some of my assessment is informed from what I get from talking to my counterparts around the world, these are the places with negative interest rates, in terms of the sort of responses that they're seeing.

Thank you. There is a question from Sophia Rodrigues. You mentioned in your speech a materially lower unemployment rate. She's asking if you could you put a number on that? Maybe I can just extend that question to say: Where would be the Bank be comfortable that we've reached an equilibrium point for the labour market and, perhaps, inflation?

I think that's a question of just seeing how we go. It's lower than here, so I'm absolutely comfortable in saying it's lower where we are now. We also know that prior to this, with an unemployment rate of around five, we weren't really getting any material upward pressure on wages and prices. Now, it's conceivable that the structure of the economy has changed a bit over the past six or nine months, there's a bit of evidence to that effect. So, we may not be going back to exactly the same world that we were in at the beginning of this year. I really think that's a question of just seeing how it goes. But, whatever it is, it's a fair bit lower than where we are now.

Fair enough. There's a question from Rob Henderson here who is on the ABE Committee. The RBA has been at the forefront of analysis of China's economy and its impact on Australia. Given the current trade friction, how does the RBA expect Australia's net export to proceed and to what extent is this trade friction a threat to Australia's economy?

There's plenty of political discourse around that at the moment. Again, I don't think I need to provide my opinion on that.

There's another question here from Justin Fabo, I think it's a follow up. I think I know the answer, but I'm going to put it out there anyway. You mentioned interest rates probably won't move within the next three-years, I think you said at least the next three years. But presumably, if there is an early vaccine, our borders open up, growth recovers, then the Reserve Bank would be at least open to considering an earlier normalisation?

Well, we'll just see what happens. So first of all, it looks like we're getting more and more positive news on the vaccine each day, which is great. Then people have to get the vaccine. Then it's not just Australians have to get the vaccine, but other people have to get the vaccine before we open up our borders. I think the other point to remind people of, it's not growth, we've got to remember about levels here. We've had the largest decline in the economy in a long period of time, minus 7, minus 8%. So growth rates can be strong, but not get us back to the previous level. At the moment, we didn't think we'd get back to the previous level of GDP where we were at the beginning of this year for two and a half or three years, or at least a couple of years. So, we've got to get back to where we were first, and then we've got to get back to where we otherwise would have been before we are anywhere getting close to what would be a desirable outcome.

So, the bottom line in all of that is that there is a hell of a lot of uncertainty out there and we've just got to see how all that plays out. It's much better to be sitting here speculating about a positive turn of events rather than a negative one. But at the same time, I'd just point to what is happening in the northern hemisphere, particularly in Europe, where output is going backwards in the December quarter. Here, at least, we're going to have a decent outcome, it looks like, over the second half of the year. In Europe they're going backwards, having not even anywhere near regained where they were before they went into all of this.

So, just pointing out, yes it's good that there's positive news out there, it's a hell of a lot better than the alternative. But I think we've just got a bit of way to see how this all plays out.

Thank you. A question from Michael Potter. What does the RBA see as the potential future path of the current account? Do you see any likelihood of Australia running an ongoing surplus, potentially reducing or removing our net foreign debt?

I think my last speech pre-pandemic was on this topic from memory, something like that. Anyway, I look at it more from the savings/investment side of things and we've seen a large increase in household saving. We're not seeing a hell of a lot of investment at the moment, it would be nice if we saw more. So corporate saving is actually fairly high. On the other side, obviously, the government is running a sizable budget deficit, an appropriately sizable budget deficit. So we will just have to see how all that plays out. But, at least prior to this, we'd run current account surpluses for a while and it was conceivable that they were going to continue for a while. We may see a world where the household savings is a bit higher, structurally, than it was prior to this. That's plausible. To some extent the critical swing factor is going to be on the corporate side. Is business investment, which hadn't been particularly strong coming into this episode, how strong is that going to be over the period ahead? Corporate savings is actually in a reasonable position at the moment, the question is: Are they going to invest? And I think that is probably going to be the major determiner of how the savings investment balance and, hence, the current account evolves over the period ahead.

This is a related question, Guy, it's from Danny Davis. What are your general thoughts on the benefits/risks of increased liquidity in the Australian economy arising from strategies that increase foreign capital inflow, as opposed to locally generated stimulus strategies?

We've been a net capital exporter, the flip side of the current account surplus, for the last couple of years. We have large pools of domestic savings here, some of which are invested locally, some of which are invested offshore. At the same time, we draw on some foreign pools of capital as well. I don't think I have a strong view as to which of those two is more desirable. We've got viable investment projects, it's good that someone is willing to fund them. I think, in the end, that's the bottom line, regardless of where that funding is coming from.

A question from Julia. What are your thoughts on significant tax reform to encourage investment in Australia? Perhaps I can put out a personal element to that as well: What about the announcement last week of an intention to move away from stamp duty in favour of broader land tax in New South Wales?

I think the New South Wales government did a reasonably good job of laying out a path towards moving away from stamp duty. To some extent, now is a good time to do that when your borrowing costs are so low so you can take the short term hit to the deficit, and I think your numbers show that you make that up over time, but that's a reasonable horizon. But at the moment you can afford that possibly more than any other time in history. In terms of a broader government tax reform, again, that's not my area of expertise, I'll leave that to the tax experts.

No worries. We will make this the last question, Guy. It's from Hasan Tevfik. Recently a US FOMC member suggest that QE has been more effective in stimulating financial markets than the real economy. I'm not sure who he's quoting there, but do you agree and can we again have a situation where the benefits of QE are narrowly distributed?

I think there's a couple of things to bear in mind. As I said, you can just use the recent experience that we've had here. Since we've announced the bond purchase programs, yields have come down and the exchange rate has come down. The exchange rate coming down absolutely boosts domestic demand and that puts people in jobs. The biggest way of affecting economic outcomes, is whether people have jobs or not, which I think is sometimes lost in this discussion. So, higher asset prices is part of the transmission mechanism, that's true. But, the overall aim here is to stimulate aggregate demand and that gets people in jobs and that has the first order impact in terms of economic outcomes across the community. So, I think that's one thing we have always got to keep in mind. So, at least I take comfort from the fact that since we've started down this path since November, at least in anticipation of us going down this path, we've seen the exchange rate come down by a noticeable amount and enough to have an impact on the economy, and to have an impact on employment and people's livelihoods.

Thanks, Guy. So, look, we'll close things there. Thank you again for your speech, very much appreciated by the ABE and of course, by our audience and also for taking all those questions. I wish you and other senior members of the RBA all the very best in helping to navigate the Australian economy through what remains, I would argue, an ongoing economic and health crisis. So, thank you again.

Thanks to everyone online today for your engagement as well. Please keep an eye out for upcoming ABE events. This is our last event for 2020, but of course we have another year approaching and of course our annual conference is in February, as always. So please keep an eye out for advertising on that. We will have a great array of speakers, including some drawn from the Executive Committee of the ABE, so look out for those. But, for now, thanks again for participating. This is our final event for the year, as I said, it's been an unusually challenging year for all of us. But I wish you all a very productive end to the year and hopefully a restful summer and I will see you all again in 2021. For now, I wish you a very good day. Thank you.

Thanks Stephen.