Transcript of Question & Answer Session Today's Reduction in the Cash Rate

Phil, thank you for the clear set of remarks. It included the view that, in respect of inflation, that if inflation remains too low for too long then Australians will get used sub 2% inflation. But what I want to ask is, if we did get used to sub 2% inflation but we also had sub 5% unemployment, in that circumstance would that be such a bad thing? That is, it might be slightly embarrassing to the Bank not to have inflation at 2 to 3%, but wouldn't it be simpler to change the target than complain about sub 2% inflation if GDP is okay?

That scenario is purely hypothetical. I'm confident that if we can get the unemployment rate down, perhaps to 4.5%, there'll be enough pressure on capacity in the economy that inflation will rise. After all, we're not that far away from the bottom of the 2% band, we're maybe half a percent below so in the broader scheme of things we're not that far below, and if we can get the unemployment rate down a bit, perhaps to 4.5%, then I'm confident that inflation will rise back to be comfortably within the 2% to 3% range.

I don't see at the moment any case for changing the framework and for the 2% to 3% goal. It's served us well for a quarter of a century. The discussion in the academic literature at least is raising inflation targets rather than lowering them. And the reason people talk about raising inflation targets is if you have a higher average level of inflation, you have a higher average level of interest rates, and the if the average is high you have more capacity to lower them when you really need to and so support the economy. So I don't see any case for lowering the inflation target and I think we'll gradually get there but it's going to take time and it's going to take a lower rate of unemployment and hopefully today's decision will help deliver that.

In your speech, you said that the RBA's economic outlook hadn't deteriorated since early May, so why didn't you cut then?

After the May meeting, we indicated that we were watching the labour market very carefully. We'd seen at the May meeting inflation come in lower than expected, and we were watching the labour market outcomes and since the May meeting, we had confirmation that wage growth remained quite low, and the unemployment rate did increase. We're seeing quite strong employment growth in the Australian economy but it's not driving unemployment down because more and more people are joining the labour force. So as I said in my prepared remarks, that gave us more confidence that the economy could sustain a faster rate of employment growth without putting pressure on capacity. So those two pieces of information we received between the May meeting and the June meeting were really critical, and confirm this idea that the labour market still has a lot of spare capacity, and we're really responding to that today.

Governor Lowe, unemployment in New South Wales is in the low 4s. There's not a lot of hint of wage growth resulting from that. You've told us today that the NAIRU is 4-point-something, is it probable that it's closer to 4 than 5?

It's possible. My current central estimate is 4.5 but as I said at the Parliamentary Committee Hearing that we had a few months ago, there's quite a large wall of uncertainty around that estimate. So 4.5 is kind of midway between 4 and 5 obviously. I think the experience here in New South Wales with the low unemployment rate is that wage growth is still roughly 2.5%. So that suggests we can get down to mid-4s without having a wages problem in this country. It's certainly my expectation that we can do that, and we've got an open mind what the right number is, we don't have to make a judgement about that now. The judgement that we made today and progressively over time is that we can sustain a lower rate of unemployment than we currently have. How much lower? I don't know. I hope it's close to 4, but we don't know yet.

Governor Lowe, in your previous role as Deputy Governor you had mentioned 1% as kind of being the lower bound on interest rates. Since then the world has moved to below zero territories. Have your views changed on where the lower bound is for Australia and do you see benefit in interest rates going below 1% or even 0%? And another question, you mentioned lower Aussie dollar as one of the benefits of interest rate cuts today, but there was no reaction in the market today from the rate cut. There's a lot of impetus on the US dollar, which is actually falling and as a result a lot of other major currencies are going up. There's expectation the Fed will cut rates more than the expectation for RBA is. Do you think that you would have to cut a lot more to make sure the Aussie is lower?

Well there are a lot of issues there. The currency didn't move that much and I think that's largely because the market expected the decision today. I don't think it came as a surprise to many people and the foreign exchange market is very good at incorporating expectations and that's what it did today. It's clearly the case that a weaker US dollar, whether that would come from lower US interest rates, would be a complication for us. Because a weaker US dollar, all else equal, means a stronger Australian dollar and we don't need that at the moment. A weaker Australian dollar would be helpful for us, it'd deliver us more jobs and higher inflation. But that's a market-determined rate so we can't really do very much about that, but it's true that a weakening of the US dollar would cause us some complications.

You asked about our estimate of a lower bound. It's clearly lower than where we are now and perhaps a reasonable amount lower. If you look at what happened in the United Kingdom, the US and Canada, rates got to a quarter to a half a per cent there. So I think for many economies that is judged to be the effective lower bound. I'm not anticipating we get to those levels. As I said in my prepared remarks, the medium term outlook for the Australian economy is still quite positive. The resource sector is finally in expansion mode again, the terms of trade are rising, there's quite lot of investment in infrastructure taking place and household income growth, which has been extraordinarily weak over recent times, is expected to pick up. Wage growth has picked up a bit and I'm hopeful that the tax measures announced by the government in the budget will get through and that will boost household disposable income. Those things are going to keep the economy chugging along at a reasonable pace, so I don't expect that we'll have to get down to the very low interest rates that other countries did. We have the capacity to do it if we need to.

Before we take another one from the media, anything from the room, questions?

Thank you. I was particularly interested in your answer to the second … had and the monetary policy [unclear 00:08:29] really speak to the solution for that. In three … you mentioned that business expansion, business investing and … would … way to go and a preferred way … government and all government responses, I guess. It's a question, but I'm pleased that in a very hopefully articulate presentation you made it's the first time I've heard reference from one of our leaders the importance of innovation, for a long time. And I wondered if you could, probably not tonight but is the Bank going to expand any of it's thinking about that absolutely critical function … and the community as a whole for any sort of long term, great prospects for this wonderful country.

Well this is not our core area of expertise. We're experts hopefully in money and macro and finance so how to generate a strong innovation culture in the country, I don't really know how to do that, but what I do know is that it's incredibly important. Now we've made ourselves a wealthy, prosperous country through lots of different channels, one of which has been digging stuff out of the ground or growing stuff out of the ground. I suspect that whether my kids have a materially better living standard than mine is going to depend on what comes out of here, out of people's brains. Not what comes out of the ground. So focusing on how we deliver an education system that delivers great ideas and innovation, I think that really needs to be high on the national agenda but it's not a core area of competency of the Reserve Bank. It's really a general reflection of where future prosperity is going to come from. And you're much more of an expert on this than I am.

Thank you, Governor, I was wondering if you could just expand a bit more on the global trade wars and your thoughts about the read-through for Australia and how worried we should be about that.

Well I'm very concerned about what's happening. It's clearly the biggest threat to the global economy. Australia has benefited greatly from the rules-based international system, and incrementally you see that system being eroded. So that's a danger to us and to other trading economies. I don't know any country that has made itself wealthy through tariffs and restrictions. I know a lot of countries including ours, who has made itself wealthy by being part of an open rules-based system so I think it's quite concerning what's happening.

In the short run, I see from my international meetings that the uncertainty that is being generated by the trade disputes is leading to firms to delay investment decisions. You could understand why this is happening you don't know what the final tariff configuration is going to be so there's uncertainty, so you wait. And this is one reason why we're seeing in Europe, in parts of North America and some of the Asian countries, an investment decline. Because firms are waiting, they're uncertain, they don't know what the final configuration is going to be. So, the more firms wait, the bigger this negative deal can become. Now if enough of us wait, it really makes a first order effect to the global economy. So I think it's the uncertainty at the moment that's the issue and we don't know what the final rules of the game are going to be. And it's affecting business decisions right around the world right now. I don't think Australian businesses are particularly delaying investment decisions because of this but if it goes on, they will. I am quite worried about it.

Do you think that there is a danger in having this long period of ultra-cheap money that it could distort capital flows, inflate our set prices and keep alive some of these so-called zombie firms?

Not particularly. I don't see many examples of zombie firms in Australia. I know at the international level people worry about this but it's not an issue that I am concerned about in Australia. The level of interest rates is low as you say but housing prices remember in Sydney have fallen 15% over the past year so the low level of interest rates right now is certainly not inflating housing prices. So I don't worry that a continuation of the current level of interest rates is going to cause problems in the asset markets. It's something we need to keep an eye on but it's not a primary concern at the moment.

You mentioned in your speech about how bank funding costs are lower, and yet today we saw two of the four banks not fully passing on that rate cut. Did the RBA miscalculate in thinking that they would pass that on swiftly and fully and did the banks that didn't pass it on misread the room?

I didn't say that they would pass it through, I said they should pass it through and I say that because the funding costs have changed a lot and I think it should've been passed through and it's disappointing to me that it hasn't been the case. All I can do is encourage people to shop around. If your bank has not passed this through, then I encourage you to go and look for a better deal somewhere else. The experience has been over recent times that when people do go and look for a better deal from another bank, or even actually ask their own bank, they can normally find a better deal. So I encourage everyone who has a mortgage to go to their bank and ask for a better deal. If you haven't done it recently, you'll probably find you can get a better deal, because in the end the way we get banks to compete with one another, is be responsive consumers. We go and search out better deals, we ask for them, and then we switch. So if the 25 million of us who live in Australia can make the banks compete more effectively by going and asking for a better deal and switching … so I encourage everyone to do that if you're unhappy with the mortgage rate you're currently paying.

Thank you very much for your questions, and thank you to the Governor for his frank responses. This draws the formal proceedings to a close.