Transcript of Question & Answer Session The Reserve Bank's Operations – Liquidity, Market Function and Funding

First question I've got here is around the long end Chris, the suggestion has been made that the RBA is effectively leaning on the balance sheets of other global central banks to keep the long end in check by targeting specifically three year. I remember that was the closest we have to a topic of controversy when the initial measures were announced that it was purely three-year yield control. The question is, does this matter, and what's your view on the long end more generally and a somewhat steeper curve?

Well, I'd answer that by saying that the reason we're focused on three years as the target is that it complements other elements of the package and it's also worth remembering that it's a pretty important part of the curve for funding for banks. So that's true all the way from the short end out to about three years or so. It also appears, at least statistically, to have a pretty strong relationship -- the short end of the curve -- with the exchange rate. So for all those reasons, it's a useful target in terms of the transmission of monetary policy. Certainly, there is less funding at least for the private sector at the 10 year point than is true of other economies, such as the US, to which we're often compared. Now, in terms of other central bank policies, which are focused at the long end of their curves, well, to the extent that that helps stabilise financial conditions globally, then that's a good thing. Maybe that has had some effect on our exchange rate, causing it to appreciate more than otherwise. But again, the interest rate differential of us versus major economies out to about three years seems to be the more important determinant.

Thanks, Chris. I'm going to add a question that's coming from the audience, indeed came in last week. So someone who's very keen feel we should definitely get this one asked. One component of balance sheet liabilities is notes on issue growth in 19-20 was an extraordinary $9.5 billion following more modest rises of $4.3 and $1.9 billion in the two previous years. Can you share with us any insights on the reasons or demographics of this recent demand?

I don't have a lot of insights. It would seem strange on the surface. I think the one thing we know is it's not being used for transactions for obvious reasons. People are actually trying to avoid using hard currency to avoid the spread of the virus as much as they can. And that's been encouraged of course, also by the major retailers asking for customers if they can to pay electronically. So it's not for transaction purposes. So one only has to assume it's for some people feeling like they need a store of value, but much more than that, I can't add.

Thanks, Chris. A couple of questions on deposits. On a high level, you mentioned in your presentation obviously, and I think most people will be aware that major banks, in particular, deposit inflows have been very large. Do you expect those to unwind as we move on through the crisis? I mean they're obviously caused in one form or another by the crisis. So are you sort of working on the principle of that's a temporary phenomenon?

Not really. I mean, some of that might be a bit temporary, it's a bit hard to know, I think there are some different forces operating in different directions. Those who are keen students of my earlier speeches would know I've got a speech on money is born of credit, and that's a point I make in the speech on this effect. Some of the larger businesses tap their credit lines with banks and the funds that they took out are with the same banks on deposit. So that pushed up deposits and money growth. But now it seems that many of them are not using those funds and they're paying them back because the credit facility is relatively expensive and they don't need the funding right now. So that's going to go the other way.

The other thing that's a bit tricky here is the state governments, when they issue debt, they leave their funds on deposits. So essentially to the extent that banks are providing the semis with some funding that tends to increase the money supply. So that's going to be ongoing, but of course the other one is when we've purchased bonds from the non-banking sector, that puts money in the accounts of the non-banking sector. So all of these sort of factors are at work. It's a bit hard to know where it's going to go. One imagines that a key and long term source of growth comes from credit and that's not likely to be strong in the coming period.

Okay. Thanks, Chris. A more specific question on deposits that's coming from the audience: Is the Bank aware that non-major banks have effectively closed their doors to deposits from organisations like councils, universities and corporations? If so, is any consideration being given to this perhaps unintended consequence of the TFF and the resultant increase in concentration of deposits with the major banks?

Look, I'm not across the specific details of that. What we did know early on was quite a large inflow of deposits was coming from superannuation funds. They were trying to liquidate some of their portfolios just to get ready for the demand for early withdrawals that was being made available to some people. But they are wanting to hold a lot of liquidity and they tended to move some of that money away from some of the smaller banks to the larger banks. I think some of that's unwinding now, that process. But I don't know that the smaller banks, I haven't heard that they're turning away deposits, it may be that they're just not willing to offer the same rates, but that's true of deposits across the banking system, including the majors.

Okay. Thanks Chris. A question from one of our panellists actually. In the short end does the combination of low yield and lack of volatility give you cause for concern around the attractiveness or viability of ACGB at the front end of the curve? Over a sustained period of time, do you think this means the RBA will ultimately have to restart purchases?

Our focus is just on keeping the three year yield at around 25 basis points. It has been fairly close to that for most of the time that this has been in place. We notice it's been rising a little bit of late but it does move around from day to day, week to week. That's something we're watching closely and we said, if we need to, if it was to move too far away from 25, then we would stand ready to buy more. So I don't know that directly answers their question, but the main thing we're focused on is very much on that three year target in terms of that side of our package.

Okay. Thanks, Chris. Moving on, on the term funding facility you mentioned in your presentation, the impact that you've seen on the cost of credit provision in the wider economy. The question is how would you assess the efficacy of the TFF as a means of stimulating credit supply? So I guess I have to ask specifically in the context of volume, I have certainly seen it myself raised in some research notes, that economic conditions of the kind we've got there isn't a great deal of desire from SMEs to invest the growth. So I guess the question is, has it worked on a scale front?

It's important to recognise the difference between credit supply and credit demand, which I think the question you pose does. On the supply side, it certainly has helped to reduce the cost of funding both directly and indirectly. So that's kind of a supply response there for you. In terms of encouraging an increase in credit because it is cheap funding and there is this incentive where you get more dollars of cheap funding; an extra dollar for every dollar of credit to a large business and an extra $5 for every dollar of credit that goes out the door from a bank to an SME. I think it is encouraging banks to lend. We've already seen that in play. There is an extra allocation available that reflects growth of business credit for a range of banks. So the initial allotment was around that $90 billion is now up to $150 billion, much of that has been because of credit going out the door to larger businesses. But banks that have increased lending to small businesses have got an extra allocation from that. But you're right the growth of overall credit will depend very much on demand as well and growth of that is expected to remain weak.

Sure. Thanks Chris. A question has come in from the audience, I guess you might've been expecting this one, it probably will be dealt with reasonably quickly. If inflation turns into deflation can a negative interest rate policy be an option to take?

Well, I don't have a lot of extra to add to what the Governor said recently on this. Our sense is it's not going to be helpful in the current circumstances. It's also not clear just how helpful it's been elsewhere, even in economies where it has been used. One thing I'd mention in that regard is just that where it has been moved into negative territory central banks that still have further room to move potentially further into negative territory, haven't really pursued that option. Of course, one of the problems is it impinges on banks' profitability and therefore their willingness to lend. So that's not helpful for macroeconomic conditions. And I would also just finish on this by saying, interest rates at the moment, they're really not a constraint on the capacity or willingness for people to borrow. It's just that aggregate demand is weak and companies are facing economic uncertainty. So I think that's what's weighing on demand for credit more so than the price of it.

Sure. Thanks, Chris. Look a related question is being asked about further intervention by which specifically is meant new measures as opposed to a resumption or stepping up of, for instance, government bond purchases. Should we assume that the bar is very high to further measures being put in place by the RBA?

Well, I think the Governor provided a sense of that when he spoke last week by noting that many of the other things that are new measures are not without costs. And that's not to say they would never be pursued, but they have these costs and you'd have to think very carefully about the circumstances you were in for each and every one of them. So I think it's sort of broadly true that in the current circumstances we face, they're not under consideration but that could change if things get decidedly worse.

Okay. Thank you, Chris. Moving on, another audience question here. How do you view the trade-offs of running a large balance sheet? And is there a limit to how large you would let ES balances grow?

Well at the moment, really the size of ES balances are partly determined just by banks' demand because as I suggested in the speech when they come to our open market operations we're providing them what they demand and that's settled right down. So it does seem we've satiated the demand for now. There are other forces at work including through our package that will probably push ES balances higher and the term funding facilities is very much one of those. So there's room for further growth in our balance sheet. I don't see that as being problematic. What we're really trying to do is pursue these programs first and foremost to keep funding costs low, to promote the supply of credit to the economy. So if that means our balance sheet has to grow a bit, then so be it, and that's fine and not a problem.

Okay. Speaking of things that the Reserve Bank may be relatively relaxed on, audience question says the bank seems relaxed on the level of the currency. Is that due in part to being less important at the moment, given the situation with international education and tourism?

Certainly those mechanisms mean that depreciation won't be stimulatory through trade in services one way or the other. But it is still an important aspect of the transmission of monetary policy. But our assessment at the moment is it's not that far from its fundamentals, which are of course commodity prices and the interest rate differential. And it's also about the relative performance of our economy versus the economies offshore. So yeah, again, our assessment it is not that far from fundamentals and on that basis, we wouldn't be overly concerned. But the Governor's talked at some length for many years, even well before the pandemic, that many countries in the circumstance where they had spare capacity you'd like to see inflation move higher would like to be able to dial up a lower exchange rate. But not everyone can have that. But at the moment, our assessment is it's close to its fundamental value.

Sure. Okay. We've already had a question about the about the market based consequences of an anchored three year yield. Here's another one. What's your view on the outlook for the three year futures market given where getting a five year contract later this year and that the, the three year yield and volatility seems pretty anchored.

I don't have a particular view on that that I can offer and provide any insight on. So I'll pass on that, if that's all right.

No problem at all. Okay, onto something that you didn't directly address in the presentation, but has been talked about in market circles somewhat. One of the other measures that I guess maybe it wasn't mentioned because most people have suggested it will have a relatively marginal impact, is corporate repo eligibility. The view seems to be, it should be a modest positive for the local corporate bond market over the sort of medium to longer term, but probably no more than that. Is that sort of what you were hoping for, was that the plan? And just while we're on the topic, a specific question about that would offshore banks issuing in Aussie dollars as in non-ADIs qualify as the repo is under a corporate designation?

You got me there. I'd have to look it up. It's quite clear on our site, but let me not make up the answer without looking at that or waste everyone's time by finding it. I think I'll take just the first part of the question to say, look, we acknowledge that it was going to be a helpful change. And the evidence I've seen isn't conclusive, but I think you've already seen, at least at the time we made the announcement, you saw a small improvement in yields in terms of for the issuers of the paper that would potentially qualify. So that's a small benefit because it enhances the liquidity of those bonds means it's a bit cheaper for them to issue them. So that's good again for the funding cost, but it is a pretty marginal thing and I wouldn't over stress that it's going to have a significant effect, just a marginal and helpful effect in the right direction.

Okay. Probably just time for one, maybe two more. Another technical one, you mentioned in your presentation, the cash rate calculation during the most stressed periods. What about the RBA view on BBSW calculation, was that as functional as could be expected? Did the stressed period make any change of view on BBSW?

Not really. It's a bit hard to know exactly why, we saw some periods where the volumes traded at the window when the rates were set sort of drop down for a time, but they've come back up again. The volume of issuance has sort of stayed roughly where it's been for some time. There are still very good reasons for the banks to continue to issue BBSW, so it should endure as a useful benchmark. But it's also got its own procedures in place when volumes can move lower for a time and I think that things are essentially fine for that to happen, there's no longer term impact. I think as far as it being an important benchmark, it will continue to be a reliable one.

Thanks, Chris. Look, I think we might leave it there. We're on time and we've covered quite a lot of ground and I certainly really appreciate as I'm sure the audience does you taking a lot of questions that were, you know, off piece, and we jumped around a lot, so thanks for being willing to engage with all of them. This is normally where I'd ask for a round of applause, but you'll probably have to imagine that I'm afraid, Chris. I'm sure it's happening in home offices across the nation as we speak, but thank you very much, Chris.