Transcript of Question & Answer Session Risks to the Outlook

Thank you, Guy. What do you expect from recession in the US? I guess, and that's coming from an anonymous person.

I'm not sure that I expect a recession in the US, so I don't know what to expect from it. Well, someone else said there are clear recession signs. Let me just talk a bit about the yield curve going inverted, which I assume is what the last question is about, I'm not sure how much of a signal that is at the moment. If I look at the yield curve right round the world, there's a reasonable case the term premia are negative. I stick a normal term premium on the end of the US yield curve, it would have a nice, not particularly large, but nevertheless upward slope. The same is true here actually. I'm just not sure how useful that signal is, if that's what the signal you're referring to. At the moment the US economy is actually growing above trend. So they've got a fair way to slow from here, but nevertheless that is a risk certainly, and the trade disputes I think are the key risk to that.

I suppose that's how I'd answer that question, it's obviously a risk out there, I'm not sure I'd be relying on the yield curve as the best signal of that risk given the yield curve has not obviously got the same sort of structure that it's had historically.

Did you see the question there about the cash rate?

We always look at labour market and inflation outcomes because labour market has a material influence on inflation outcomes, so I'm not sure. I can't say it's like 40%, 60% or something like that, but we obviously take account of the full suite of information in the Australian economy in determining our assessment for policy, including how developments in the labour market feed through to wages and inflation outcomes. I don't think that's changed materially any time recently, I think it's basically the same sort of analytical approach that we've taken over a number of years, certainly over the last 25, 30 years.

I see there's a question about courses adapting to the risk management in the industry. I assume that's for me.

I think that's one for you, Elizabeth, not for me, but I'm happy to take a few questions from the floor, if not all of you are masters of the technology.

The RBA came out after the election, cut 50 points. Market says it's about to do another 50. Could you point us to the statements just before the election saying we're about to rush out a hundred points of cuts, or if not, was there a significant change in the RBA's approach or view on the economy?

So what we got was an accumulation of evidence, that one, the labour market wasn't as strong as had been previously indicated, sorry, from the unemployment side, employment growth actually continued at a reasonable pace. The other piece of information we'd got over that time was the wage outcomes were lower than we'd previously expected. Both those pieces of information emerged after the election. So over the course of the first half of this year it was highlighted that the risks around the outlook were changing. We got evidence which confirmed that that was the case and that also the rate of unemployment that the economy could sustain without jeopardising the inflation outlook was probably lower than we previously thought. So having taken account of that accumulation of evidence that causes it to deliver the rate reductions that we did in June and July.

Any other questions from the floor, we have time for one more?

In terms of the outlook, one of the strongest bits you've got is business investment and I've read and reread the statement a few times, as you'd expect, you actually talk about non-mining business investment growing more slowly, mining investment picking up a bit over the next year and then a bit more. But you've got 4% growth this year, nearly 6 next year, nearly 6 the year after for business investment. The global risks to business investment seemed to be down. Can you just elaborate a bit on how those forecasts come about?

Some part of that is related to the infrastructure, so the infrastructure's both on the public and the private side, but a decent chunk of it is coming through on the private side and the outlook there still looks pretty solid. In fact, in this city, and in Melbourne, infrastructure investment is about at capacity as well, that's what we get told. So, I think some decent chunk of it is coming through from there, and so it's in the private sector but it's piggy backing, very much closely associated with the infrastructure investment going on, which has, obviously a large public sector element to it as well.

Maybe if I just, given you're going to talk about benchmarks later on, maybe I'll just talk a quickly about those two benchmark questions. On the issue about RMBS, so what products are suitable for a credit or a risk-free benchmarking, that's a good question. So the thing about what state governments do, I've actually always found it odd that they historically have issued as a spread to BBSW given they are much more closely aligned with the Commonwealth government's issue so, more with a risk-free rate, That's why I think it is really good that SAFA has led the way in issuing a security based on a risk-free benchmark.

When it comes to something like MBS though, that is much more of a credit related product or if a bank's issuing a piece of debt that's clearly a credit related product, and so a credit spread, a credit benchmark, I think makes reasonable sense. So, I think it's really a question of thinking what's fit for purpose, and I think historically no one's actually particularly thought about what's fit for purpose. It's just LIBOR is out there, or has been out there for a number of decades. That's what you use, so you just write it into your contract without thinking about whether it makes sense or not. And if you go back prior to 2007, the spread between credit rates and risk-free rates was about zero anyway, so it didn't make much difference, then it blew out a lot, which also highlighted that maybe you should be thinking about which one is actually more appropriate.

So I think we've now got to the point that people are aware that these two benchmarks do move in significantly different directions, or can move, and actually maybe you should be thinking about what's actually fit for purpose as well as what's likely to be more robust in the medium term, which comes to the other question.

At the moment we see a reasonable amount of transactions in BBSW as the ASX provides us with the data that underpins the benchmarks that they're calculating each day. It's not, you know, they do utilise the fall backs on some reasonable frequency depending on the tenor, but by and large, the market in Australia in terms of short-term bank paper is enough, clearly enough to underpin those benchmarks for the foreseeable future. But to hark back on something I mentioned in the speech, I don't think you should completely assume that is always going to be the case.

So at the very least you should make sure that you know and are comfortable with the fall backs in your contracts and, one that you actually have them, and secondly that you're comfortable with them. So, at the moment we don't see anything on the horizon necessarily threatens the longevity of BBSW, but coming from a risk point of view, it is very much a risk that you should all be aware of and making sure that you have the appropriate mitigants in place so that you're not suddenly exposed to that risk should it suddenly materialise. I said, we don't expect that to be the case from BBSW, but for LIBOR, we do expect that to be the case, and so you absolutely need to have those fall backs in place and be transitioning away from LIBOR where possible between now and 2021.

Thank you so much Guy, look I'm sure everyone would like to join me in thanking Guy for an excellent and thought-provoking presentation.