Transcript of Question & Answer Session Delta, the Economy and Monetary Policy

Thank you, Phil, for that very timely and topical speech as always. So we'll launch ourselves into the adventure of the Q&A session. So we've got plenty of questions that are coming through and I encourage the audience to keep sending them through. So this is, I'm going to start with one of the schools, Governor, so it's from Michelle [Boolan] at Ravenswood. So given the low interest rate environment of the last couple of years, young people are wondering what this means for inflation pressures once the economy has recovered. So in the RBA Board room, how do you evaluate the urgent short-term needs of the economy with those long-term effects before you make your monetary policy decisions?

Our strategy at the moment is to support the recovery of the economy, to get the unemployment rate down, to get wages rising more quickly and have inflation return to the target. And I think if we can do that, people will have jobs and they'll get bigger wage rises to go with the jobs, and in the end, that's going to help not just young people, but everyone who's lucky enough to live in Australia. So, our challenge is to get more people into jobs and to get their wages rising more quickly.

As I said, I know many young people are very concerned about the level of housing prices and they blame the central bank for the high level of housing prices, and it's true that low interest rates are having an effect. As I said in my prepared remarks, there are much more important structural factors at play here and if our society wants to address housing prices, I think we really need to tackle those structural factors. Ever rising housing prices as well as low income, I don't think serves our collective good very well. And it's something that as a citizen, I would like to see addressed. As a central bank we can't do anything about it.

Thank you, Phil. So there's one here from Stephen Halmarick, who's Chief Economist at CBA. And first Stephen, as a former chair of the ABE, says thank you Governor and really great to have your ongoing support. His question is on monetary policy. So is there a big difference between how strong the economy needs to be to continue to taper and eventually end bond purchases and how strong the economy needs to be to actually raise interest rates as you spoke about? Or is it just a matter of time?

Well, it is a matter of time, but there is a difference. We're not going to raise the cash rate until inflation is sustainably within the 2 to 3 per cent range. So we've got to actually achieve the results of that. On the bond purchases, we expect to certainly taper them and then stop those before we reach that target for inflation. What we're wanting to see on the bond purchases is substantial progress towards those goals – the goal of getting back to full employment and inflation in a 2 to 3 per cent range. So, once we're confident that … well, first of all, we see the progress and we're confident that progress will be continued, there'll be an opportunity to scale those bond purchases back further, because I think we all know, don't we, that we can't continue buying bonds forever. So most central banks are now considering tapering. As they make progress towards their goals they're kind of scaling back and we'll find ourselves hopefully in the same position next year.

Thank you, Phil. You mentioned in your prepared remarks about the Board has discussions about both monetary and fiscal policy, and there's a question from Robert Bruce about that. And he's framed it in the sense of, is there an ethical debate in the RBA Board room about future interest rate management and the high level of debt that's capitalised against a future cohort of Australian families?

I'm not exactly sure what Robert is getting at here when he talks about kind of an ethical debate. What we do talk about are the implications for the future vulnerability of the economy, of households continuing to rack up debt at an ever-accelerating pace. So, as I said in my prepared remarks, through the Council of Financial Regulators, we've been discussing the hypothetical situation in which incomes are growing, say at five or six and debt's growing at 10, and if that was to become the norm in Australia, I think that would be problematic. We already have a highly indebted household sector and it's okay for a while for credit to be growing much faster than income but given the very high level of debt we already have, my view is it's not going to serve our collective interest to have debt rising at 10 or 11 or 12 per cent a year when incomes are growing at half that.

We're not in that situation yet and we may not get there. I think if we got into that situation, both APRA and the Reserve Bank would be seriously considering whether there were regulatory measures that could be taken which would slow the rate of credit expansion. Not a situation I hope that we find ourselves in, but we can't rule that out.

Thank you, Phil. It's another question here from a student and it's Sangeeta Narayan from Blacktown Boys High School. How resilient are the banks during this pandemic?

Very, very resilient. In the global financial crisis a decade ago, not in Australia but also around the world, the banks amplified the shock. In fact, in many cases they were the source of the shock. In this case, the banks are absorbing shock. They're helping the economy recover. They've been an important part of the Team Australia effort to build the bridge to the other side and that's partly because of the regulatory changes that were made in the system over the past decade. Banks have a lot more capital, they have a lot more liquidity, their risk management systems have improved. So I don't have any particular concerns about the health of the Australian banks. They're in good shape and they're helping the country absorb the shock as they should and they're not amplifying the shock as they did previously.

Thank you. There's a question here from Sarah Hunter. With other central banks signalling that they will tighten policy sooner than you're suggesting, are you expecting an appreciation of the Aussie dollar over the next couple of years? And if so, how does this contribute to the recovery in the economy? And a follow-up question already. How much do international border restrictions limit the effectiveness of this channel?

I've learnt over many years, not the forecast the exchange rate. So my expectation is that the currency in a year's time will be where it is now, because that's what all the research shows that the best forecast is the current value. So we're certainly not counting on a depreciation of the Australian dollar to drive the recovery.

So the second part of the question was how much do international border restrictions limit the effectiveness of the channel? As I said, I don't see the depreciation of the currency being a central part of the recovery mechanism so international border restrictions are not having a particular influence on that element of the transmission mechanism. They are affecting, though, investments in the country. Through our business liaison program, we talk to businesses who want to invest. They need to bring a piece of capital equipment in from Germany or Japan, and when they install the capital equipment, they need to bring in the technician from either Germany and Japan. So they're having trouble doing that, or they're unsure about whether they'll be able to get the specialist labour from overseas to come in, and in some cases that is leading them to delay or to push out those investment decisions. So one of the benefits that we will get, when we're able to open the international borders safely, is that firms will have more confidence that they can invest and buy capital equipment from overseas.

Thank you, Phil. There's a question here from James Crawford from Cbus. And what are you hearing from the business liaison unit about labour costs and wage pressures across industries at present? Presumably a shortage of labour in mining, for example. Are they paying higher wages as a result?

If you'd asked me this question in June, I would have told you at every single meeting that I have and my staff had with business they were talking about labour shortages. Couldn't get the workers, didn't have the right skills, and it was becoming very, very difficult. And you saw that in the various business surveys where firms are reporting labour shortages have been one of the main constraints on production. By and large, we're obviously not hearing that at the moment. Firms have other concerns and the concerns are the ones that are arising from the shutdowns.

But I know many firms are looking forward to later in the year and early next year when the restrictions are eased, and the possibility of those tight labour markets returning again. And this is one reason why I think we're seeing firms try and keep an attachment to their workforce.

In terms of wages though, I've found it interesting, that even in those parts of the labour market that have been tightest up until June – as you say, parts of mining, there was parts of construction, some professional services – wages were rising more quickly. But more quickly meant wage rises maybe of 3 or maybe an outsized wage increase of 4. So that was the best we were doing in the tightest parts of the labour market. There are obviously some exceptions to that where some workers, cyber security specialists were getting bigger wage rises. But in general, even in the tight parts of the labour market, wage increases were 3 or 4 and the vast bulk of Australians were getting wage increases starting with a one.

So to me, this speaks to the huge amount of inertia in the system. There's been a lot of anchoring of wage expectations around 2. Firms, want to keep control of costs. They're uncertain about the future, so they don't want to lock in larger wage increases, and this is all completely understandable. And this brings us back to our underlying strategy here of trying to create a tight labour market so that firms have to compete more aggressively for workers, and pay wage increases starting with a three rather than a one. And what type of labour market we need to achieve that? It's hard to know, but my current judgement is that the unemployment rate needs to fall to the low fours to get us in a position where wage increases start with a three rather than a one. Time will tell though.

Thank you, Phil. There's a question here from Charles Hornery, and it's about cash in the economy. And Charles asks, 'With the trend accelerating for the reduced use of cash for transactions, as well as the broader digitalisation of the economy, what progress has the Reserve Bank made on issuing a new digital form of cash or a digital currency?'

The progress we've made is really conceptual. I'd say we haven't made that much progress. At the moment our main focus is really on wholesale applications of central bank digital tokens. We've done a number of experiments with various parties, and we're currently involved in one with the BIS and the Monetary Authority of Singapore, and other central banks still look at cross-border payments.

So in that wholesale area, there are a number of applications which we can see a strong business case for. In the retail space, I find it more difficult to find the underlying business case. At the moment, Australians can move money between their bank accounts using the NPP in five seconds. Most of us can do that from our mobile phone. We can do it very quickly and at no cost. So we already have a very effective payment system in Australia for moving money around very cheaply, at no cost, very quickly. The alternative would be that rather than moving money between bank accounts, we hold value, not in a bank account, but in tokens on our mobile phones. And that we can move money between the electronic wallet on our mobile phone. So that's the alternative world rather than moving money between bank accounts, we move it between electronic wallets.

The issue we're trying to think through is: what's the public policy case for that? There's obviously quite a substantial cost in the central bank building such a system, and it would have implications, I think, for the operation of our own financial system as well. It may be in time that people find that a better way of transferring value between our electronic wallets, rather than between our bank accounts. I'm yet to be convinced that a public policy case is there for us to invest what would be tens, hundreds of millions of dollars to ultimately build such a system, which is secure, reliable, and serves the needs of 25 million people when we already have a system that transfers value very efficiently.

But if the day comes where the public policy case emerges, we'll be ready. We're doing work in the background to understand what the technology would involve, ultimately what the costs would involve, and conceptually what the risks are to the operation of the financial system. So, we're continuing to look at it, but I'd be misleading you if I said that we're about to announce the operation of an e-AUD operated by the central bank. I can't rule it out forever, but we remain to be convinced of the public policy case for it.

Thanks Phil. Very comprehensive answer. There's another question here from Ravenswood. This is from Zita [Demarge] this time. We're starting to see a rise in price prices due to rising costs, especially in the USA and Europe – and I'd add there perhaps container costs and shipping costs certainly going up around the world – is the RBA concerned about a rise in inflation due to a shift in aggregate supply?

We're certainly watching the rising costs that you talked out. I think in the US, the example that people have been focused up until recently was the rise in the cost of second-hand cars. There'd been an interruption to the global supply chain for new cars because of computer chips and people wanting to drive cars rather than catch public transport because of COVID. So the prices of second-hand cars went up a lot, and as was said in the question, transportation costs have gone up a lot as well because of rising container shipping costs. The issue is: is this just transitory, or is it the first step to permanently higher inflation? That's a good question that people are going to have different interpretations of it but my view is that it's still largely transitory.

There are disruptions to global supply chains. And the used car example I was talking about, the problem here starts with computer chips. South Korea and Taiwan have increased production so I think the peak in chip prices justis probably behind us. So the system recalibrates – it takes time – and as it recalibrates, some of the price pressures we've currently seen will dissipate. It would turn into persistently higher inflation if the temporary increase in inflation we're seeing now would feed through into persistently higher wage increases. Because the two things go together, don't they? Higher inflation, higher wage increases.

So to have persistently higher inflation, you've got to have consistently higher wage increases. The experience of the last decade and a half, not just in Australia, but around the world, doesn't suggest that wage increases are going to quickly ratchet up. There are these powerful structural forces that have been in operation for a couple of decades that are keeping wage increases fairly modest and I don't think that a temporary period of supply disruption in computer chips in some other markets is going to fundamentally shift those dynamics in labour markets around the world. If it does, then we've really taken the first step to higher inflation persistently, but I don't think that's the most likely outcome here, but it's something to watch.

Thank you, Phil. There's another question here from a former chair of the ABE, Rob Henderson, and he too would like to thank you for your contribution to the Foundation today. Rob's question is: the statement you made about the cash rate not being lifted until inflation is securely within the target range, unless the mean lag and the operation of monetary policy has become much shorter in recent years, doesn't this mean that the RBA may be risking an inflation overshoot if it doesn't tighten policy until inflation is already in target?

I think conceptually that's possible. It depends upon, obviously, what's going on in the dynamics in the economy at the time. But if inflation would have been in high twos for a while, or temporarily above three, given the experience we've had over the past decade or so I don't see that as problematic, especially if we were confident it was going to come back to the anchor of the 2 to 3 per cent.

So it's possible that if we wait until inflation is really kind of close to 2.5per cent that we'll have a period of inflation temporarily above three. I don't see that as particularly problematic as long as it's going to come back down again. And that remains the North Star for us – making sure that inflation is between 2 to 3 per cent on average – and we'll adjust policy to make sure that happens. But that's a problem for tomorrow. First of all, we've got to get and sustain the headline underlying inflation between 2 and 3. That's my priority at the moment.

Thanks Phil. There's a question here from Leanne Taylor from Cbus. Thank you, Dr Lowe, for your time and openness. Could you please share your underlying assumptions for the outlook for China, and influence on global aggregate demand and implications for Australia, for example, commodity prices and service exports.

Thank you for the question. Obviously, what's going on in China is incredibly important, not just for us, but for many other countries around the world. China's the major trading partner of a huge number of countries, including Australia. At the moment, there are a lot of moving pieces in the Chinese economy. I'm finding it increasingly hard to put all those pieces together. At the moment, the high-frequency indicators have softened a bit. At least in some areas of China they've had to take quite stringent measures to shut down cases of COVID. So that, I think, is affecting economic activity in a number of areas. A second thing that we're seeing is in commentary by Chinese officials, is a much stronger focus on the concept of common prosperity and less on economic growth. In the past, Chinese officials would often … The first thing they would do would be to recite the very strong GDP figures. Increasingly they're focusing on common prosperity, and we're all trying to understand what the ultimate implications are of that.

In the financial sector, those who've been following this, there's strain on a very large property company, Evergrande. In the steel market you see the Chinese authorities trying to contain emissions by effectively limiting steel production, which is keeping steel prices higher, but iron ore prices have come down as there are effective limits on production. So you've got COVID, the concept of common prosperity, some stresses in the financial system and their efforts to achieve their climate goals. So as I said, there are a lot of moving parts there at the moment. We're continuing to watch all those moving parts very closely and how they work out is obviously very important to us, and to the globe.

Thanks, Phil. There's a question here from Ivan Calhoun of NAB, who of course, is our major sponsor for today. And Ivan's interested in the wisdom of using extremely low interest rate settings to try to boost wages. In previous speeches, you've pinned very low wages growth on factors such as technology and globalisation, but these are not particularly targetable with interest rates. There seem to be costs in running very low rates, and you've mentioned house prices a couple of times. Are there any other policies that could assist the RBA in achieving faster wages growth?

The only policy we have had at our disposal is to boost aggregate demand. And as I said before, our strategy is to boost aggregate demand to the point that firms are having to compete for more labour. I'm confident that if we can get the labour market being sufficiently tight, wage increases will lift. We saw that during the peak of resources boom when labour was in short supply, wage increases did lift. I don't think they're going to ratchet up quickly, but firms, if they're making profits, they want workers and ultimately, they're going to be prepared to pay for that. So, that's the Reserve Bank strategy.

Fiscal policy, of course, also influences aggregate demand, and fiscal policy's done a remarkable job in supporting aggregate demand over the past year and a half and I very much welcome that. Once we get through COVID and things are kind of returning to normal, I think there's a legitimate discussion to be had about how the relative roles of fiscal and monetary policy evolve in influencing aggregate demand. That's outside of our control. What is in our control is the levers we have to influence aggregate demand and we are making sure that all of those levers are pulled as hard as they can to get people into jobs, to get firms to compete more for workers and to get wage increases back to three point something.

Thank you, Phil. There's a question here from Michael Potter, and I think it's in the context of some comments you might have made earlier about the impact of immigration on wages growth. And Mike was asking, the RBA considers or seems to consider that immigration does affect wages growth, whereas Treasury does not hold that view. Can you reconcile this apparent difference of views, or is there a difference of views?

No, I don't think there is a difference of views here. I was disappointed in the reporting of my comments on this a couple of months ago. I strongly believe that if you take a long-term perspective, that immigration has been a source of much of Australia's success. And actually, over time, the fact that we've been able to import people, or people have come to Australia, want to build better lives, they come with skills and resources and that's made our country more dynamic. It's made it open, it's bigger. It's brought us to the world and ultimately that's given us a higher standard of living. So I think that would be the view of Treasury as well. That doesn't preclude you also holding the view, that against that long run trend, there can be times when elevated rates of people coming into Australia do affect the labour market.

And my view is that we went through such a period up until fairly recently. The number of people coming into Australia was higher than it had been in the past and the change was very quick. And, particularly for certain occupations, it was much easier for firms to go overseas and find workers with skills that were in short supply, rather than compete for the resources in the existing labour market. And during the period where firms are able to do that, that did compress wages growth, or slow wages growth for those skills.

So, long term fantastically beneficial for Australia, but there was a period there when the openness, the fact we were connected to the kind of global labour market, did affect the supply dynamics in the Australian labour market and prices fell into supply and demand. We change supply a lot, the price does adjust. And so, it's a more sophisticated argument that many people would like to have – immigration good or bad? Immigration, fantastic over the longer term, but at the same time, it did affect the supply dynamics in the labour market for particular jobs and that affected the wages of those jobs. So thank you for giving me the opportunity to clarify that.

Phil, there's a question here from Nicki Hutley, independent economist, and it's about climate change. So given the size and duration of the COVID economic shocks, what lessons do you think we should take from this experience in relation to acting on and managing future shocks from climate change?

That's a very good question, but I'm not sure quite how to answer it because I don't know what to take away from COVID for climate change. I think what I can say is in the international meetings that I still have, largely by Zoom, I get a lot of questions, both from other central banks and by investors about climate change, Australia's preparedness for climate change, how our capital markets are evolving and how government policy's evolving. I think we all know this, that investors are increasingly applying a climate filter to their investment decisions. And they're applying that filter when they're thinking about investing in Australia, either in financial assets or real assets in the future. So, there's a great deal of interest globally in our approach to climate change and that filter's is being applied, and I think it'll be increasingly applied.

So it's important we have a positive story to sell there, because if we don't and that filter is applied and people don't like what they see, the cost of capital for Australia will go up, and it will be more difficult for firms to raise funds, and when they do they'll pay more. I think Australia has some particular advantages here and we need to be in a position where the global investors can see those advantages. So that's the lens that I bring to this and the financial regulatory community is very aware of this. Together with APRA, we're working on climate risk vulnerability assessments and, together with ASIC and the international bodies, increased disclosure of companies of climate change risk.

So, if people are going to apply this filter, which they are, companies need to put the information out there so that the investors can assess it, don't they? So, at the Council of Financial Regulators we're very conscious of the fact that this filter's being applied so we're doing the risk assessments and disclosure with ASIC. What COVID means for climate change, I'm not sure …

Thank you. We've had 48 questions submitted. So, clearly, we're not going to ask all of those Phil, but I apologise to those whose questions I can't get to. I'll ask two more. Phil, this one is from Alicia Barry at the ABC. Thank you for your talk. And it's a broad outlook question. How concerned are you about potential new virus variants entering the country once borders open and further derailing the recovery?

All I can say is its one of the downside risks, isn't it? We get new versions of COVID coming into the country and that leads to lockdowns. And when the lockdowns occur, economic activity is restrained and people don't have the jobs and incomes they once had. So it is a downside risk. It's certainly not the base case, though, that that happens. Once the majority of the population are vaccinated, the medical advice, at least that I've read, is that there is risk of a new variant, while it's still there, it's not particularly high. I think the base case is most of us get vaccinated, restrictions ease, firms start to feel that desire to hire and invest as they did earlier in the year and we go back to the previous track. So that's our base case, but we could get pushed off that again.

We'll make this the last question, given we're running out of time. And given we're supporting a very important Foundation here, I thought it would be a personal question that I'd end on. And it's from Jane Durham from QSuper and Jane adds that she's a mother of three children. What does a bad day look like for the Central Bank Governor? And what approaches do you use to move beyond this?

What does a bad day …? I don't actually have many bad days, although I'd have to say, last week I had a few bad days because I had to visit the hospital for a couple of days because my neck had frozen. A bad day for me, I think is looking at a Zoom screen for eight hours non-stop and keeping my neck in a single position, which I did for a couple of weeks and it got to the point where it had frozen into position. So I can tell you that was a bad day for me and as you can tell, I can move my neck now, and I've fully recovered. But seriously, I do see the stresses firsthand that the pandemic and the lockdowns are causing for young people. We all know, those of us with children, that they rely a huge amount on their social networks.

They can't go to their parents and discuss every issue, can they? At least not in my household. What they do is they go to their friends and they talk with their peers and their colleagues in the schoolyard and they haven't been over to do that and that does take a toll on them. They can't see their friends. I know my family's looking forward to the day when those social networks can be re-established. It's okay doing it on Zoom, but it's not the same, is it?

No

Especially for kids, those accidental contacts of the support they get from their peer networks. And I'd have to say their teachers, as well. I see this with my kids, how the teachers have been supportive of them over the years, and they tell me, it's just not the same talking to a teacher over Zoom.

You can't hang back after all the other kids have left the classroom and say, I'm having a problem with this – you can't do that anymore. So, I don't have many bad days. I feel incredibly fortunate to live in such a great country. We've got a fantastic health system, public administrations are very effective and the economy is doing quite well. So, I try and keep that perspective and if you can see over my right shoulder, I still have my glass half full coffee mug and I think we all need to remember how lucky we are to live in this great country.

Thank you, Phil. I think that's a great place to finish. So thank you again for your engagement today as always, and for answering so many questions.

Thank you very much.