Transcript of Question & Answer Session Restrictive Financial Conditions in Australia

You probably don’t get a chance to talk about interest rates all that often these days. Its fascinating, Aaron referred to the higher than normal interest rates. For some newer borrowers, these are the highest rates they’ve ever encountered, while you’ve got Boomers sitting in the paid off house going, ‘dude, 17 per cent, call me when it gets there’. That neutral interest rate, it looked like its somewhere between sort 3.5 – 3.7 [per cent]. What is the neutral rate and what conditions the RBA need before we move out of restrictive, back to neutral?

I didn’t put a number in my speech because I want to emphasise the uncertainty. If you eyeball a graph, it’s a bit above 3.5 [per cent]. What do we need to see though? I think what we’re looking for is for inflation to move towards the targeted and sustainable fashion. So, we want to see evidence of further fall in underlying inflationary pressures. The data of late, though, have been quite mixed. They’ve reinforced in fact the need to be alert to upside risk to inflation and so with regards to the interest rate path, the Board really has said they’re not ruling anything in or out.

Looking outside of the banking sector, can you see any risks emerging from the private credit sector, in particular, and spilling over into the main financial system.

I think private credits performs an important role in the market. It’s something we watch carefully. We’re not overly concerned because it’s not especially large in Australia but it’s something we’ll watch. But I mean businesses, as I said, are still investing. They’re still over—it’s quite a contrast between business confidence and business conditions and the way the consumer feels, which is well below average. For businesses, it’s much closer to average.

Seeing the increase in the discharges, does that tell us that consumers are selling their house rather than participating in hardship processes with banks? What can we do about that, but also does it mean some of those other impacts around arrears and things are maybe underestimates of the true impact to some of our consumers?

All of that is impossible – I think the thing I take from it is that, in an environment of higher interest rates, I think what this tells me is those with more leverage are the ones more likely to be selling, which makes sense. The fact that the housing market is in a fairly healthy condition in terms of prices rising that makes that job that much easier. So, I think that’s what’s happening. Households are deleveraging now, they’re selling it to somebody else, but the somebody else has got less leverage. They’re putting down a larger deposit. So that’s the household sector as a whole deleveraging.

Crypto. So, Bitcoins just halved again, seems to be holding up fairly well. Ether at record highs but if I really want 100x I probably need to speculate a bit, Christopher, but when you dial up Robin Hood at three in the morning having had a couple, where are you dropping a few lazy G’s in crypto at the moment?

Well, I’ve long said, that crypto is not an asset that I would play with. Yes, its banned in my household for kids, that’s gambling. We’ve pushed them, if they really do have spare cash, into the equity market instead, that’s a different form of gambling. No, it’s not an asset and it’s not a form of payment either. I doubt you could go buy a nice cappuccino with a spot of your crypto today.

Does the Reserve Bank keep an eye on how much money is in there and is there any potential risk if that market went completely to pot in an instant?

No, because it’s not generally backed up by leverage. So, when people speculate on assets, the real concern is when they back it up with a lot of leverage or that forms an important source of collateral. As best I know, crypto isn’t a good source of collateral.