Transcript of Question & Answer Session From QE to QT – The next phase in the Reserve Bank's Bond Purchase Program

Thanks very much, Chris. There are some questions that have come through. Just a reminder, you can ask questions through the conference app. If you go into the agenda in the current session, there's a Q and A in there, so some people have obviously worked that out. If not put your hand up we'll get you a microphone. I'll look around the room. But in the meantime, I'll ask the first question that has come in. Chris, what do you think is the neutral cash rate and how quickly might we get with that?

Well, the first point I'd make on the neutral cash rate, it's very uncertain. It changes over time. It depends very much on potential growth, people's willingness to take risks. Model estimates would have it somewhere between 2 and 3 at the moment, but that's very rough and maybe even those bands are too narrow. I think the neutral rate's something that you know when you get closer to it.

Okay thanks very much. Next question is about wages growth, obviously wages growth so far is still under-shooting. How important is wage growth as an input to interest rate settings?

Oh look, I think it is important. It's certainly not the only thing. The Board is going to be looking for evidence on inflation and the labour market and wages growth is important on both scores. Of course, the recorded wage growth by the ABS isn't sufficiently high for inflation to be durably in that 2 to 3% range. But we have seen it rise. We are seeing other evidence of wage pressures picking up and we’re pretty confident that they'll pick up to an extent that will make inflation consistent with that 2 to 3% band.

Okay thanks very much. Next one the US market is increasingly leaning towards pricing in a recession locally. What are the RBA’s policy options if the economy here goes into a downturn or recession?

Well, it's very hypothetical. But with that caveat in mind, I think the thing people often get focused on because it's the much more exciting thing and easier to grasp, certainly in the press, is to focus on changes in policy. But remember, policy is very stimulatory at the moment. It's the level of rates that matters. So if more stimulus is needed, we're already delivering that stimulus right now. I often hear us being referred to as putting our foot on the brake when we raise rates. That's not the right analogy. At the moment, we're just easing off the accelerator. There's more of that to come, our policy is very stimulatory, including these bonds, as you saw, are going to be sitting there on our books for quite some time. So that's providing stimulus as well.

A couple of related questions, speaking of the bonds on the book, has any consideration being given to selling down holdings specifically as an anti-inflationary measure?

No. Largely for the reasons I explained. For a number of reasons, as I suggested, we don't think it'll be particularly helpful to sell them. It could reduce the stimulus a little bit, but it would only be modest. I think you can achieve what you need to through a sufficient tightening in the cash rate, if needed. As I said it would complicate the task of the issuance authorities. Remember we've got a pretty large amount of our balance sheet rolling off in the next couple of years through the TFF.

Okay. Now the next one that was related is going back to hypotheticals, I guess, but is the RBA concerned about stagflation?

Well, I know that's a concern globally. I don't think that's an issue that is pressing for us right now. Remember we've got an Australian labour market that looks strong, we've got pretty strong momentum in economic activity. We're opening the borders. We've got very high savings still for households and many businesses. There's a pipeline of construction work to be done, both private and public. And there's quite a lot of ongoing policy support. And remember wages growth is strengthening, but from pretty low levels and unlike the rest of the world, we've got the benefit of higher commodity prices, as tragic as the cause of that is, we are benefiting from those commodity prices.

Okay thanks very much. Some more questions coming in, that's excellent. What will the RBA do with the cash received from upcoming maturities?

Well, we have an asset and we have a liability and so once the bond matures, that asset goes, and then the liability gets withdrawn as well. There's less ES balances in Bank’s accounts. That comes about because the government has to fund the maturity of those bonds, so the cash comes from somewhere, it comes out of ES balance accounts.

Okay. Moving on, a technical question here, as you hike rates and pay commensurately higher interest costs on ES balances, how comfortable are you with the RBAs capital position? Are you at risk of requiring a recapitalisation?

Well, we’ve said a bit about that in our annual report. We'll say more about that this year. You can imagine that we’ve made some losses on the bond portfolio associated with the rise, and sharp rise in yields. But I can't say much more than that at this stage.

Sure. Okay. Just going through these chronologically as they come in, they're coming in thick and fast now, so I'll try and get through as many as possible. A question about, do you have any concern about a hard landing given that companies and consumers made plans around the guidance that the RBA gave in late 2021 that rates wouldn't increase until 2024?

No. I mean, we'll be watching the capacity of households to repay loans and how that's going and how it might affect consumption, but remember, a lot of households and mortgage holders got ahead of things during the pandemic, not everyone of course. But savings of households went up very significantly. They're still sitting on those. Those who had mortgages got ahead of their mortgages. The other thing of course is when banks and other lenders decide on how much to lend to somebody, they test them about their capacity to be able to repay at higher rates and that threshold has been increased recently by APRA, so households should be able to manage that. And indeed, remember the idea of higher rates is to actually reduce people's consumption capacity, not to turn consumption around, but just to slow its growth at the margin as well as investment, that's how you make sure you keep a lid on inflation.

Okay there's an inflation question here actually next in the list. Does the RBA believe raising the cash rate will counteract rising inflation effectively given that inflation is arguably more supply driven than demand driven?

It's a good question. I think there's a lot of uncertainties and we've been the first to emphasise these. But the two big pictures we've seen are these supply side pressures and there isn't much a central bank can do about those. But their effect on inflation should wane over time. In order for them to continue to push inflation higher, you need those supply pressures to ratchet on and on and ever upwards. So as long as that doesn't happen, as long as they stabilise or even reverse a little bit, that should keep inflation from rising and may even help inflation fall. On the other side, we had low wages, we were looking for nominal wage growth to pick up and that's in process. The Board will be watching how those two forces play out.

I might ask one myself, Chris, with apologies to the people who are waiting in the queue. Where are you in terms of the forecasts and expectations you had about the supply chain costs. I mean, we've talked for what seems like the best part of a year now about how we expect those to ease, but, you know, would you have thought it would be happening by now, when do you think it should start to happen?

Well, this isn’t my area of expertise anymore but my sense of some of the numbers I've been seeing is there were signs that those supply side pressures were coming off - shipping costs, for example, is a good example of that. The thing we have to be very watchful though is what's happening in China right now. But remember that's kind of a demand and supply shock all at once. So that's a big unknown. And as tragic as the war in Ukraine is and as long as that's likely to persist, again I come back to the point, as long as the pressures from those supply side shocks don't ratchet higher that shouldn't add to inflation, as long as they stabilise that will not be adding to inflation. If they even ease a bit they'll bring inflation back a bit.

Okay thanks very much, Chris, we'll try and get through two or three more. You’re probably expecting this one. Does the outcome of the election impact the RBA’s forecast?

No. There you go!

Maybe we'll get through four. Okay another question about the change in guidance. The Governor spoke about a review into forward guidance as a monetary policy tool earlier this month. How concerned is the RBA about reneging on forward guidance and that dent in confidence in the Reserve Bank?

Well, I think obviously it’s not good for credibility to have to do that, but equally so, it's not good for our credibility to not be responsive and flexible to changing circumstances. So that's the most important thing to focus on. But look, we're conducting some internal reviews ourselves. At the moment I'm overseeing one on the yield target. We'll be presenting that to the Board and then in due course, we'll make that public and then we'll roll through some of the other policies. But remember, some of them still have some way to play out, including things like the term funding facility, so some of them might take a while.

Okay. Another technical one here, we'll try and get two more in. In November, 2019 pre QE, the RBA presented a chart referencing ACGB to OIS basis. Is the RBA concerned with the current deeply negative Sovereign to OIS basis, particularly in the three year basket?

No, I think some of that's come about through our yield target policies, but no not particularly concerned. I think the market's functioning well enough and as I suggested our program of lending bonds into the market, if that helps, is helping to defray some of those pressures.

Okay maybe one more, another technical one. Why do you put so much faith in the stock effect versus the flow effect?

Well that's just what the evidence seems to show. That's what you would think theory would tell you about the effect of the level on yields. I think the flow is important when it comes to things like bond market functioning. That's what we were doing very early on in the pandemic with our bond purchases. But in terms of things like the yield target, but more in particular, the bond purchase program it really does… the evidence does suggest the stock matters. I think there's a footnote in my full speech available online talking about a paper that's coming out soon, and I believe it's as soon as tomorrow, which will provide quite comprehensive econometric analysis for those who want to go through all that technical detail.

Can't wait. Please join me…

It's a good paper.

Thanks very much, please join me in thanking Christopher Kent. Thank you.