Transcript of Question & Answer Session Financial Stability Through the Lens of Business

Thank you, Michele. It was really good to hear firsthand how the business sector is relevant to the financial stability in our region. We've got question time now, Michele, so I hope the audience has been listening closely and has got some questions, but in the meantime, I've been listening and there's a few questions that I've got that I thought was quite relevant and I wouldn't mind knowing Michele's thoughts on it.

Michele, you talked about tight credit conditions for small businesses, and we all know that we've been facing it, and certainly for the last year it seems to be getting worse. It's a great big concern for our chamber members. What policies could improve access to our finance?

Yeah, am I on? Yes, I am on. Yes. So, it is a good question. As I highlighted in my speech, credit for small businesses has been a perennial issue for some time. We know it's been tight and we know, as I said, it's tightened up even further recently. This isn't positive. I think there's a few things on the horizon. First is that the government has introduced the Australian Business Securitisation Fund.

For those of you who don't know what this is, the government have committed about $2 billion and that money is going to be used to invest in securitised small business loans. The market for securitised mortgage lending is big, there's lots of securitized mortgage lending. Small business lending has been more difficult to get off the ground.

The idea of this Securitisation Fund is the government will put money into buying securitized loans from smaller banks and non-ADIs. They're not aiming at the big banks, they're aiming the small banks. This hopefully will kick-start, help these institutions to make loans, securitise them, which then they can be purchased by this government fund in effect.

That's one thing. The banks themselves are looking at the possibility of putting together a fund. Now, that one is for the private sector to do, and the idea is there that they would, all the banks would commit money to a fund and that that fund would be used to make loans to small businesses, so that's another positive policy prescription. The other thing, there's two other things that are happening. I think one of the issues for small businesses is information, so when making loans for mortgages, I think banks find it relatively easy to understand what information they need.

With small businesses, it's a little bit more bespoke. I think what might help is we've now got comprehensive credit reporting, and we've got open banking coming as well. That's going to allow people and businesses, small businesses, to share their information with other financial institutions, and this might help to introduce some competition and help to overcome some information barriers that currently are there. I think there's a few things on the horizon, but I think from Reserve Bank's perspective, not just from a financial stability perspective, but also from the perspective of the economy, tight conditions for small business lending is not helpful.

You mentioned the thoughts on the government actually having some new policies. Do you have a time frame in regards with those or is it more of a long term sort of …?

The Business Securitisation Fund is up and running. It's got a timeline over the next few years to inject, I think there's 250 million for next year or so, and then another 500 million. They're basically building it up. That does have a timeline, and as I said, it's already up and running. The private sector venture isn't so much up and running. That one's taking a bit more time. Open banking is coming in the next few years, so things are happening. It might be a little slow for small business people, but things are happening.

You also mentioned that the drought, what are your thoughts on the agricultural sector and where they're standing at this particular moment and I guess the future predictions?

Sure. The agricultural sector, because quite a large portion of the agricultural sector is unincorporated and not listed. We don't have a lot of current information. We have a lot of anecdotes, we can observe ourselves a lot of what's going on there, but we don't have a lot of really current, hard data.

I go back to what I said in my speech, which is that the agricultural sector, particularly in regional communities, its influence … The impact it can have is actually much bigger than its size. Even though the agricultural sector might account for a relatively small part of the total production, its influence spreads broader, because if farms aren't spending and they're finding it difficult, that flows onto small businesses in the areas as well and that then has an amplified effect. So I guess what I would say in response to that is that we need rain, but I think we ought to be very alert to the flow-on effects that difficulties in the agricultural sector might be having more broadly on other businesses.

Yeah, definitely. I did notice last night there was a bit of rain. I woke up to rain, so that was always a good sign. Last night I was watching the news and it did state there's starting to be a move, a slow move in the housing sector. How's the RBA viewing that?

Yeah, so the housing sector's an interesting one. Joy mentioned the Sydney, Brisbane, Melbourne centric view, and often when people are talking about the housing market, they are talking about Sydney and Melbourne and Brisbane. What's happened basically is that after rising very, very sharply, housing prices in Melbourne and Sydney in particular have come off quite a lot over the last two years.

The issue of that for financial stability is that concern that if people get into difficulties with their loans, and prices are falling, they can't get out of difficulties by selling their house if their house is now worth less than the debt. From a financial stability perspective, we've been focusing on this, trying to understand the potential implications for households and banks if prices fall so far that people find it difficult to get themselves out of difficulty.

We haven't seen that typically. Even though prices have fallen a lot, most people bought their houses still a long way prior to that, and they're still quite high in Sydney and Melbourne. Having said that, there are some areas of the country that in particular are Western Australia, housing prices in Perth have been falling for years and years and years and years and years. There are a lot of people in Perth for whom debt now is higher than the value of their home.

That is an arrears arising in Perth, in Western Australia. That does pose some potential risks. I think what we're observing now is that things seemed to have stabilised a bit in Sydney and Melbourne. Ultimately, I think that is good for the whole economy, because I think what's been happening is that as housing prices have been falling, that's been putting a bit of a damper on people's sentiment. That might be partly one reason why people aren't consuming.

When that puts dampers on sentiment, then that's not good for the economy. Hopefully with a bit of a stabilisation in the housing market, the financial stability concerns will come off a bit and hopefully people might feel a little bit more comfortable.

Did anyone else in the audience have any questions?

Thanks. Thanks Michele. Very interested to … Australia is a very externally focused economy, and currently we've got two elephants going at it pretty hard to our North and East. How concerned is the RBA about the impact on our terms of trade with the trade war between the United States and China?

Sure. Yeah look, it's a good question. It's a question that a lot of people are very interested in at the moment. We've spoken a little bit about this, and I suspect you'll hear a bit more about this from the Governor tomorrow when he fronts before the parliamentary hearing. What I would say is that our concern here is that the extent to which this trade war is meaning that a lot of people, a lot of businesses are saying, "I don't want to invest because I'm just not sure what's going to happen."

With businesses all holding back on their investment, that's obviously having impacts more broadly on the economy and world economy. This economy as well. So, I think the biggest concern is that unless the uncertainty gets resolved, hopefully in a positive way, not a negative way, then businesses will come back and start investing, because they're just not confident at the moment.

If I had my financial stability hat on, from our perspective, what we're more interested in I guess is the potential flow-on effects, if this has big impacts on China, and China's economy starts to slow dramatically, that as you've mentioned, we're very exposed to China. That might have implications for us, for our economy, and if it has implications for our economy, things turn down, unemployment goes up. That's when we might start to see arrears rise, those sorts of things, and that's when the financial stability concerns start to come to the fore.

Number one, investment is the thing that's suffering at the moment, and number two, we'll be watching closely what goes on with China's economy.

Michele, as of yesterday, the Aussie dollar against the US has hit a 10 year low, which is a pretty bad situation. From my understanding, as far as the balance of trade numbers is concerned, a lot of it's reliant on the iron ore sector, and that's pretty much dependent on a mine collapse in Brazil, which now the Brazilians seem to have sorted out, and they're starting to export again. So moving forward, what is the Reserve Bank's view as far as the balance of trade is concerned, the Aussie dollar? The cash rate I think is now at 1 per cent, which means when you go down to like .25, that's quantitative easing territory. Is that all on the cards?

Yes, a number of questions in there, some of which I probably don't have the jurisdiction and the remit to answer. First point I would make is the governor is talking tomorrow morning, 9:30, at the parliamentary hearing. He's going to be asked every single one of those questions I suspect, and listen to his answer. A couple of general points, though.

The exchange rate, as you know Australia has a floating exchange rate. The exchange rate is part of the mechanism through which monetary policy works in Australia, so when interest rates decline, usually you see the exchange rate, it's usually in a period when the economy's not doing so well, the exchange rate declines and that makes our exports more competitive. That helps us, so that's part of the process of monetary policy working through the system.

At the moment, interest rates are at an historic low. The board has already said that they will be monitoring things and if they need to ease further, at an appropriate time they'll consider that. But at the moment, I think we're just looking at what's happening, we'll wait and see. As I said, though, the exchange rate is a part of the process through which monetary policy works.

Yeah, thank you Michele. My question relates probably to some extent to the two former questions, but you've said very little about the cash rate during the presentation this morning. I just wonder if you might be kind enough to give a little bit of background as to the way the RBA looks at and considers the relationship between exchange rate, cash rate, and the bank bill swap rate. Obviously, there's some confidentiality I imagine in the way, but just some background as to how the RBA judges those three components of our system.

Sure. The reason I haven't said anything about the cash rate is that it's actually not my area. I'm not in the monetary policy area. I can give you a few facts, if you like. The way we think about it is the cash rate is basically the bank's policy operational rate. That's the rate that we target as our policy rate. That interest rate is the interest rate that is paid between banks in the cash market when they're trying to get basically money from one another. That's basically the cash rate. Bank bill swap rate is something else we also look at. That isn't a policy rate, but that gives you some indications of demand for three-month money. It's a little bit further.

Cash rate's overnight money. The bank bill swap rate's talking about three month. Often three month, there's a variety of terms, but further out. And the exchange rate is not something we target as such. The exchange rate is end effect of our policies. As I said earlier in answer to the question over here, part of the way that monetary policy works is you lower the interest rate, that increases the interest rate differential between ourselves and other countries who maybe have left their interest rates where they are.

That puts down the pressure on the exchange rate, because people can earn returns which are higher somewhere else. That's part of the monetary policy process. We don't target the exchange rate as such, so the way I say the relationship is we have one instrument, that's the cash rate. And we target that, and then the others are market rates which tee off that.

There's a general sense in which we want to understand market conditions, so we observe all of those things, but we don't target them. I hope that helps a little bit with your understanding, but I'm happy to direct you to some material on the website which actually explains some of this stuff in more detail.

Thank you. Michele, thanks for coming and that was a great presentation. Lots of graphs. I wonder what you all get up to in morning tea and lunch hours at your office. How important and critical is sentiment beyond everything else? A lot of data, a lot of numbers, but how critical is sentiment?

Well, I think sentiment is very important. I alluded earlier to the fact that one of the impacts of the trade dispute seems to be sentiment to invest. It has a very real impact. Consumer sentiment obviously, if the consumers aren't confident then they're not going to spend. I think that is really important, and we do look at a number of indicators of sentiment. They're not hard data in the sense, they're not actual numbers of houses being built or actual numbers of actual tonnes of iron ore being dug out of the ground, but they're things that you can look at to get an idea for how people are feeling about things. Yes, I think the answer is yes.

Thank you, Michele. That's probably all the time that we do have for this morning. Feel free if you'd like to speak to Michele, perhaps afterwards, if you'd like to discuss some more issues, or discuss some more matters with her. Would you please put your hands together and thank Michele?