Transcript of Question & Answer Session COVID-19, the Labour Market and Public Sector Balance Sheets

Thank you, Phil, for delivering another very timely and topical speech. Thank you so much. You would normally be enjoying a thunderous round of applause right now. But we are in a different situation, as you said. So we'll go to questions. And there have been a lot of questions submitted. I'll start with one from a member of the media. This is Edward Boyd from Sky News who's asked, Governor, what is your reaction to the federal government extending JobKeeper and JobSeeker until March next year?

Well, I welcome the extension and the tailoring of both those measures. They are both providing important support to households and businesses, and they both play an important role in reducing the costly scarring to the economy that I spoke about earlier. On Saturday night I participated in a G20 video meeting of the governors and finance ministers and one of the main messages from the IMF on that meeting was it's very important that we keep the support measures going. We've got a while till a pandemic is passed and we need to continue to support businesses and households while we're living through the pandemic. The IMF drew to our attention that the biggest policy mistake to make at the moment would to be withdrawing the support too early. So I think it's positive that the government's continuing the support, it's positive that the banks have continued their support through loan deferrals. And I can assure you that the RBA will continue to support the economy until we're confident that we're making progress towards two to three per cent inflation and towards full employment. So I've got a while to go and it's important to keep this support going.

Thanks, Phil. There's been quite a few questions about inflation and how it's affected by, as you described, the Reserve Bank's program of buying bonds. So one of the questions coming from a student at Pittwater House, but there's been several others of a similar nature. So I'll paraphrase them. Essentially, the question is, why haven't we seen an outbreak of inflation since quantitative easing was greatly expanded overseas during the global financial crisis and now in Australia? And when do you anticipate inflation perhaps accelerating back into target?

That's a very good question. Thank you. Inflation is driven by two fundamental factors. The first is expectations of future inflation, and the second is the balance between demand and supply in the economy at a given point in time. But inflation expectations, they are low right around the world at the moment and they've been low for some time, and it's understandable why that's the case. There's been a significant shock to global supply over recent years, which has been deflationary. Inflation expectations are low and I think they're going to stay low. The second element is the balance between supply and demand. And at the moment, demand is weak despite what other central banks have done overseas for the past decade by injecting a lot of liquidity into the system. Businesses and others don't want to use that liquidity to invest and spend. And so that means that demand is weak relative to supply and inflation's low as a result.

So until we can create more aggregate demand in the economy relative to the economy's capacity to supply that, we're going to see inflation stay low. Inflation would pick up if businesses and households around the world said fantastic, low interest rates, I'm going to go and spend and invest. The problem is they're not using the low interest rates to spend and invest. They're using to pay back debt and to hunker down, so, until we can change that basic dynamic between supply and demand. I think inflation's going to stay low and that's the world we're going to be in for quite some time.

Thank you. There's a question here from Bill Evans, chief economist of the Westpac Banking Group. In a recent speech on policy, Deputy Governor Debelle concluded that the Reserve Bank will maintain the current policies to keep borrowing costs low and credit available and stands ready to do more as circumstances warrant. Could you provide us with some insights into what is meant by do more? Was Deputy Governor Debelle referring simply to more bond purchases, or was it an extension to the current set of policy tools?

The extension to the current set of policy tools, I went through some of those, the main ones are intervention in the foreign exchange market and having negative interest rates, we've effectively ruled those out unless something were really fundamentally changing in the global economy. So I think they're both very, very unlikely.

There is the possibility, and we've reviewed this, to change the configuration of the current package and I talked about that in my prepared remarks. It is possible that we could lower the interest rate set of 25 basis points down to 10, and it's possible we could buy government bonds. It's also possible that we could change the premise of the Term Funding Facility. At the moment, our judgement is that moving in any of those directions is like they have very little benefit.

Now, the problems the country faces don't arise because interest rates are 25 rather than 10 basis points. There are much more fundamental things at play. If we came to the view that moving in any of those directions was going to be helpful for the recovery, then we're prepared to do it. At the moment, we don't see the case to do that. I think the best course of action is to hold steady with the March package. See how that plays out, see how we recover, see how a fiscal support goes and then make a further judgement in light of both our own experience and that of overseas. So we're not out of options, but exercising any of those options right at the moment isn't the right thing to do,but it could become the right thing to do with down the track.

Thanks, Phil. There's been numerous questions on the Australian dollar, and I'll ask one from Will Koulouris, who asked: at what level will the Reserve Bank become more concerned about the Aussie dollar. It's been remarkably stable over the last month. At what sort of level either against the US or in trade weighted terms do you get a little nervous about the persistent strength of the Aussie dollar?

We don't think in terms of specific numbers for levels. It really comes down to how is the exchange rate moving in line with the economic fundamentals. So the number that would generate concern moves with the economic fundamentals. Over recent times, the Australian dollar fell, but then it rose back up and it's basically where it was at the beginning of the year. The US dollar is now weakening a bit and the Australian dollar is moving up. Commodity prices have recovered some of the falls and interest differentials are pretty narrow at the moment. So, you can't at the moment make the case the Australian dollar is misaligned. If it was to move a long way from the current value and the fundamentals didn't change then you can make an argument that it became misaligned and we have to think about what to do. But at the moment, I don't think you can make that case. As I've been saying for a long time, I would like to see a lower Australian dollar, because a lower dollar would mean more jobs, Australian business being more competitive, and it would also push up prices and get closer to the inflation target. But the Australian dollar value is set in the market and we're not going to intervene to force it lower in the current circumstances.

Governor, there's been a few questions about the most recent shut down in Victoria. What's the Bank's assessment of the likely impact? Is it too early to tell? Some troubling numbers today. What's the Bank's assessment of perhaps the impact of the shutdown and border closures between Victoria and New South Wales in particular?

Perhaps some stating the obvious to say what's happening is very concerning and we're watching it very carefully. Very concerning because of the people involved, but also the effects on the economy and it's served as a reminder to us all just how infectious this virus is and we all need to take so much care. It's also a reminder that if we don't address people's health concerns, it's very hard to get back to a normal functioning economy. With the situation still so fluid, we have not yet work through the effect on the forecasts. We're currently now starting a forecasting round and we'll provide a full set of economic forecasts in early August with the Statement on Monetary Policy. But right at the moment, it's too fluid and I wouldn't like to conjecture a number, but it is very concerning.

Thanks, Governor Sarah Hunter, chief economist at BIS Oxford Economics, has asked, how important does the Reserve Bank see overseas migration to the economic recovery, given it has been a key driver of growth in recent years?

I think it's a critical factor for the recovery. The critical factor is restoring people's confidence, so that people are prepared to go and spend and firms hire and invest.

At the margin, I think faster, population growth will help that, but I think the fundamental thing is to address the health concerns. And if we can do that, then I think we can recover quite strongly. The government has inject a lot of stimulus, so is the Reserve Bank. The banks have supported people. So we can overcome the health situation then I think we can recover quite strongly. But if we can't give people confidence about the health, the recovery is going to be very bumpy and very drawn out. I think longer term, if we move back to a world of lower immigration, they inevitably will have lower economic growth. Because it's been a very important factor, driving growth in nominal and real GDP over recent years. Coming out of the pandemic, that's one of the issues we're going to have to address. But there are a lot of other issues that we'll have to address coming out of the pandemic. So I think people are going to be more cautious. That's going to affect household spending and business appetite to invest. For quite a while we're going to have high unemployment and we're going to have quite weak wages growth. It's quite possible that we see wage numbers starting with a one or two, which I think is regrettable, less appetite to borrow and a changed property market. So they're are going to be a lot of shadows of this pandemic that last quite a few years. And low population growth might be one of them. But the recovery really requires people to be confident about their health and their jobs and businesses about future demand. That's the critical thing now, generating that confidence.

Another question on inflation and related to your comments about central bank financing of government spending. So it's from Michael Janda. Given how persistently low inflation is, isn't now the best possible time to experiment with modest central bank financing of government spending in an effort to edge inflation back towards the target range? Hyperinflation does not seem to be an immediate threat.

I would agree with part of that and disagree with another. Hyperinflation is not an immediate threat, I would agree very strongly with that. I don't think we need to experiment with monetary financing. I think that would be a big mistake. So I said the Australian government can borrow at the lowest interest rates since Federation. There's very strong demand for Australian government debt. There's relatively little government debt on issue out there. Australia enjoys a high credit rating, enjoys a reputation for being a well managed country with solid, sound, predictable policy frameworks.

So the government has no trouble accessing finance to undertake the fiscal expenditure that it wanted. It doesn't need help from the central bank. And I think if we were to provide government financing, the confidence that's been built around our institutional arrangements would weaken and that would be bad for confidence, investment and jobs over time. So we don't need to go down that route.

There's another question here from Anonymous. To what extent are you a little nervous from the expedited ABS weekly payrolls data that showed a weakening in both employment and hours towards the end of June that may suggest that perhaps the slowdown is evolving from a shock to particular sectors to a broader demand shock across the economy?

Well, we've noted that kind of that slowdown in employment growth and after the initial bounce, things do look like they're plateauing out at the moment. That's a concern and it partly reflects these various dynamics in the labour market that I was talking about. While some firms are bouncing back in hospitality, they're hiring people again and people are going back to restaurants in most of the country – and that's good for jobs – there are these other firms that are moving in the opposite direction. They've been able to survive because they had a big pipeline of work. That pipeline has run off and they're not getting many new contracts. Firms don't want to invest in so they are not getting many new contracts. And we're seeing some industries flat line or in some cases actually go backwards slightly. And we're seeing a whole number of other firms decide to restructure because they don't think demand is going to come back anytime soon.

So it's a very complicated picture. We will recover, but the recovery is going to be bumpy and I think it's going to be drawn out. The only thing that would change that is a major breakthrough by the world's scientists, giving people confidence about their health. I think if that were to happen, then we could see a very strong, robust bounce back. But while this uncertainty about the health situation lingers, it's going to be a bumpy, drawn out recovery and it's going to be a shadow over our economy for some time. That's why I keep coming back to the structural reforms that will help move us out of that shadow.

A question here about your purchases of government bonds from Phil O'Donoghue, from Deutsche Bank. You made clear again today that you are satisfied that the three year yields are around the target of 0.25 per cent. How far away from 0.25 would three year yields need to move before it would warrant a restart a bond buying? In other words, at what point does around 0.25 longer apply?

I don't want to put a number on that for obvious reasons. We've seen a couple of episodes – including late last week – since the target's been in place where yields have kind of moved from 25, 27, 28 basis points, and then they settled down again. A couple of occasions where that's occurred, it's been that there's been some indigestion in the market and the yields quickly settle down again. So for us to come back into the market, we'd need to see these rates be sustainably higher and not just driven in the short term by market indigestion as some new bond lines come on.

We will do whatever's required to make sure the yield settles around 25 basis points. But it's never been our intention to make sure it's 0.2500 every day, some tolerance for variation around it. I think the market understands that and I hope the credibility of that target means that we can continue to achieve it without further purchases of bonds. But if we need to, we will. We're not going to say kind of a specific number, if it goes about 30 or 32, then we'll jump into the market. It's really a judgement about what market conditions are.

Governor, there, there's one from Sam Harrison. How concerned are you that JobSeeker recipients were receiving more money than they previously were and some of the disincentives that may have been providing to those seeking employment? I noticed, obviously, the government's announcements this morning is addressing that. But has that been a major factor in your assessment of what's happening in the labour market, the labour supply particularly?

No, it has not been a major factor and I note that the prime minister addressed this in his press conference earlier today, so I don't have anything to add to it.

I mean, there are no doubt some cases people were getting JobSeeker and that reduce their incentive to seek out a job. So I'm sure there are some cases of that in the country, but I think it's important that we don't kind of draw a general lesson from just a handful of cases. The vast bulk of people who were on JobSeeker could not find a job. Because there were no jobs, because the country was shutting down, or certain industries in the country were shutting down, so the vast bulk of these people were not working because there were no jobs for them. So I think it's a mistake to kind of focus on just the relatively small number of cases where people were not working because they didn't have an incentive to. Over time obviously we need to address this and make sure the incentives are aligned. But for the past three months, there were no jobs for many people. That's the reality we faced.

There's been a lot of questions about structural reform and you mentioned it in your remarks. What, and again I'm paraphrasing several questions, what do you think or how big an opportunity is this for the nation to undertake some of those more difficult reforms, including in the tax system?

Well, having an opportunity, I don't know. This is in the world of politics. It's not my area of expertise or it's not appropriate I speak to it, other than to recite for you the long list of recommendations that have come out of the many thorough and worthy reports that have addressed these issues of the tax system, the balance we have between income taxes, consumption taxes and land taxes. I think many people would say that was optimal, the way we price and invest the infrastructure. In many cases, we have excess regulation that's too complicated. There are issues in the industrial relations system. The way we do skills and human capital developments there's probably room for improvement. And the incentives we've set up through both our culture and through the tax system for entrepreneurship and innovation. I mean, these are the areas we need to look at, whether it's an opportunity or not. I hope that we can look at some of these areas.

As I said in my prepared remarks, what we're doing today and what we should be doing is borrowing against our future income to support people today. It's really important we do that and the government is doing that. I'm very pleased to see that. But we need to make sure our future income is strong. Because at some point we want to get the debt ratio back down again. The best way to do that is having strong future income. And the issues I just quickly ran through, they're the issues we should be addressing to give us the best chance of having a strong future income, if we decide not to tackle any of those because they're too difficult, then our future income will not be as strong as we'd hoped and we'll have borrowed against a less strong future income and that will strain our choices in lots of different areas. It's really important we address these issues, whether it's the opportunity to do it or leave will leave others to comment on that.

Thank you. And we'll make this the final question. Phil, again this will be a paraphrase of several questions about the housing market. One element has been about are you concerned about how younger generations may be disproportionately affected by COVID-19 and therefore their ability to get into the housing market and others? Is just your general assessment of how the pandemic is affecting conditions in housing in the major cities?

My main concern for younger people isn't that they won't be able to get into the housing market, it's that they won't have a job. They won't have a training opportunity. They come out of university and they can't get a job or they finish school and can't get a job and they can't get the training. That's really important in those kind of use between 18 and 25. So that's my main concern. If they get jobs and they get training, then I think the housing situation will inevitably look after itself one way or another. So that's, you know, making sure that young people have jobs should be our priority at the moment.

What's going on in the housing market? I've been very pleased to see the amount of refinancing going on. For many years, in lots of public forums, I've been encouraging people to look at the rate they are getting from their bank and if they were getting a very low rate, go and knock on the door and set up a Zoom conference with their bank and ask for a better deal. And the bank said no, go to another bank. And one positive out of the pandemic, I think, is people being sitting at home and looking for better deals on their mortgages. So we've seen huge amounts of refinancing in the last couple of months. The value of refinance loans was almost as high as the number of loans for newly purchased properties. That's the first time in our history. So there's been a lot of refinancing. People get a better deal it frees up some cash flow and it puts some extra competitive discipline into the banking system. So I encourage people who haven't already taken up the opportunity to do that to look at their mortgage rate and look for a better deal. So that's helping cash flow and the housing market, as I said, is held up as well as I would hope. And much depends from here on what happens with the unemployment rate and whether people have jobs. So most questions come back to jobs. We've got to do our best to make sure that people have jobs. And what the Reserve Bank is doing, well, we'll help that the maximum extent we can. And I'm encouraged by the government's announcement today that that will help with job retention and ultimately job creation over coming months.