Transcript of Question & Answer Session The Review of the Bond Purchase Program
Swati Pandey (Bloomberg)
Thank you for your time, Michele. My name is Swati and I write about the central bank and economics at Bloomberg. Michele has a hard stop in about 20 minutes time, so Ill jump straight into questions. From what I understand, Michele, the hurdle for deploying unconventional policy in Australia again is pretty high, unlike, you know, for the Fed [US Federal Reserve] or the BoE [Bank of England], is that right? Are the chances close to zero?
Michele Bullock
I wouldnt say theyre absolutely zero, but one of the conclusions the Board has drawn from the experience is that its only for use in extraordinary circumstances and its only for use when, in particular, the cash rate has absolutely run out and weve got no gas left in the tank. So I wouldnt categorically rule it out, but I would say that the bar is very high, yes.
Swati Pandey (Bloomberg)
Right. Later this month, well have the first monthly inflation report, so everybody is pretty excited to see what the numbers are going to be. Do you have expectations around what the number will be, and is there a certain figure that will really worry you?
Michele Bullock
No, we dont. I think theres a little bit of water under the bridge to go with the monthly CPI numbers. I think everyone will be looking at them and trying to figure out what is the noise and what is the information in the monthly figures. So Im not so sure that, quite immediately, we will be looking at monthlies. What I would say is that our forecasts for inflation are to peak at about 7¾ per cent to eight per cent towards the end and early into next year, so those are the numbers were currently working with. Weve got new forecasts coming out soon in the November Statement on Monetary Policy. But thats our current expectation and thats what were working with.
Swati Pandey (Bloomberg)
So it will not … these monthly figures, these wont have monetary policy implications for the October meeting.
Michele Bullock
I think its unlikely because at the moment there needs to be a little bit of water under the bridge with the monthly numbers to see what sort of information content is in them, because theyre not the full CPI.
Swati Pandey (Bloomberg)
Right, right. In Australia, theres a bit of a debate going on around that we will have a soft landing or a hard landing driven by the current tightening cycle, and the RBA has said that, you know, it is seeking to cool inflation, but it is also looking at keeping the economy on an even keel. Do you think the cash rate is already close to restrictive territory?
Michele Bullock
Thats a very difficult question. This gets into debates about what people think about the neutral rate, and thats typically the way people define it, in terms of the neutral rate. In real time, I would hesitate to give a guess as to what the neutral rate might be. Im not sure its necessarily in restrictive territory yet, but it certainly was evident that we needed to get it up from the very low levels that it was. And the Board and the Bank are focused on, really, the outcomes that were seeing in terms of inflation and employment, and well be looking to see whether or not there are opportunities to taper a bit and slow the pace, but we havent got a pre-set path. I think weve said that a number of times, there is no pre-set path on this yet.
Swati Pandey (Bloomberg)
Right. The Fed [US Federal Reserve], the Bank of England and some of the major central banks are, you know, telling us that they are determined to crush inflation at the cost of economic growth. The RBA is an outlier there, right, with Governor Lowe recently saying that outsized interest rate hikes may be coming to an end, and that has also stalled a lot of debate in the market and, you know, around market pricing. What I want to ask you is: what are the key differences that set us apart? Is it the household debt that, youre worried about, or is it something else that the monetary policy path in Australia is looking different from other countries?
Michele Bullock
Theres a couple of reasons. The first is that inflation isnt as high here as it is elsewhere, thats number one. And you would see, in the UK and the US, the inflation rate there is much higher and the core rate of inflation is much higher in those countries than it is here, and its for different reasons. In Europe and the UK, theres a big element of energy prices, in the US theres a big demand/overstimulus issue going on. The second reason is that wages here have not responded as they have overseas. So, if you look at the US, and the UK in particular, wage rises are actually up around five per cent, six per cent. So theres much more of an underlying momentum, if you like, in the inflation psychology in those countries. Now, thats not to say that there isnt a little bit of a shift in inflation psychology here. I think the concern is that there is a little bit, and thats why were raising interest rates. We want to make sure that an inflation psychology doesnt get set. But, at the moment, theres at least a few reasons why we are in a slightly better position, I think, than some other countries in terms of inflation.
Swati Pandey (Bloomberg)
Right. Ill just sneak in a couple of questions before I open to the floor. With all the collateral damage across global markets from the USDs strength, is there a case for coordination among central banks to stop or manage this surge?
Michele Bullock
Well, youre going back many decades, I think, towards suggesting that. Exchange rates can play a very positive role and, at least in Australia, weve typically thought of it that way because it gives us flexibility and the ability to run our own policies, to a large extent, without necessarily having to follow what others are doing in other countries. Were not entirely immune, but it does give us more flexibility. I think its of more concern possibly for some of the emerging economies and, for those reasons, for many of those countries quite a few particularly in Latin America, they have issues with much of the debt that is issued in US dollars, which has implications potentially for financial stability in those economies. Most of our debt is issued in Australian dollars, were not beholden to the US Dollar in that sense. So I dont think, necessarily, coordination is the right thing here. I mean, in a sense, the US dollar is responding to relative economic conditions and inflation and interest rates in the US relative to many other countries, and thats what you would expect.
Swati Pandey (Bloomberg)
Right, yes. A question about China, how concerned are you about whats happening in Chinas economy? What are the biggest risk factors that youre seeing at the moment? Is it commodity prices, people flow, is it the financial market conditions, the housing market there? All of that?
Michele Bullock
Well, in one word, yes, concerned about China. Its only one of three sorts of concerns internationally, I suppose. The other being the US and Europe, and its all for different reasons. China, I think the main concern or two main concerns. One is their apparent zero-COVID approach, which means that its likely to continue to be a little bit volatile, impacts on supply chains, impacts on demand, so theres that. The second issue is the property market, and that still has not worked its way out. I know that the government, and local governments in particular, are trying very hard to support the Chinese property market. It accounts for about a third of the economy. It is huge, so its very important for the health of the economy, its also important for steel demand and hence for iron ore. So concerns about China are really around the zero-COVID and the property market and what that potentially means for growth in China and hence the flow-on to ourselves.
Swati Pandey (Bloomberg)
So what is the biggest risk for us then?
Michele Bullock
Internationally, I think its not just China. I think the biggest risk is that you have rising interest rates in Europe and the US. The US has, as I said, I think its got excess demand and its trying very hard to bring that down, and its interest rates are continuing to go up quite sharply. Europe has got its own problems. Its got inflation, but its also got a massive energy shock which is going to impact their production. So with those two things, plus China, I think the outlook for the world economy is looking quite uncertain and quite worrying, and that obviously has implications for us because of the tendency to flow through to commodity prices. So this is something at the moment that I think is very uncertain and its on a bit of a knife edge.
Swati Pandey (Bloomberg)
Right. On that sombre note, Ill open it to the floor. Okay, lets start. We have a moving mike. Please introduce yourself, your name and which organisation youre from.
Eric Johnston (The Australian)
Thank you. Eric Johnston with The Australian. Thank you for the speech, it was really, really interesting. My question, I guess, is in two parts related to the speech, the first being, as we get into a more uncertain environment, is there mechanically anything that the Reserve Bank can or cannot do with a negative equity position? And also the second part, I guess, is the tenure of the bonds on the books, should we assume that, as they mature, thats the period when its going to start getting into positive?
Michele Bullock
I didnt catch the end of the last question.
Eric Johnston (The Australian)
Thats, should we assume, as those bonds mature—the average tenure of those bonds—is that when the Reserve Bank will start getting into a positive equity position?
Michele Bullock
On the first question, no, we dont believe that were impacted at all in our ability to operate. As I said, we can create money. Thats what we did when we bought the bonds, we created money and bought the bonds. So we can do that. It would be good to get back, and it is important to get back, to a position of positive equity at some point because I think its important that we have a solid balance sheet. But we can absorb volatility over time, and thats one of the advantages. As to when we start to get back to positive equity, that isnt just dependent on when the bonds mature, its also dependent on how far interest rates rise, when they rise, when they come back, because thats going to affect underlying earnings and profits, and thats the other chunk. So theres going to be two parts to it, and how quickly it comes back will depend on both those things.
Swati Pandey (Bloomberg)
Theres the gentleman at the back there. Oh, sorry, yes.
Guest (Bank of China)
Thank you, Michele. As well now, the board has decided to not sell the bonds. But I had a quick check—please correct me if I was wrong—it may take five years, because the bank boards bonds are broadly across three to ten years, so it will take five years to let maybe half of them to mature and eventually ten years to let all of them, you know, come. So my question will be, will the RBA worry about if its too long, and in which circumstances can the RBA see that you sell the bonds? Thank you.
Michele Bullock
Youre right, it runs off, and the last bonds wont run off until 2032, so ten-year bonds. In the next couple of years though, there is a big chunk thats going to run off and thats the Term Funding Facility. So the Term Funding Facility, were lending at 0.1 per cent to the banks, and our assets are obviously not earning. Well, theyre paying us 0.1 per cent, and thats not going to offset what were having to pay for exchange settlement balances. Once that runs off in the next couple of years, thats actually going to make a big difference. Its not just the bonds that we bought through the bond purchase program, the run-off for that program is going to have an important impact on that as well. If you go to the bond purchase program paper, the review, you will see that theres a graph in there which shows you how the bonds run off. And the way mechanically it will work is that theres sort of a tipping point where they run off enough that were making enough valuation gains, realised gains, now on the maturing of those bonds that are running off, and its enough to offset the losses, including our underlying earnings from the fact that weve still got the banknote seigniorage. So you think of it as a bit like a tipping point, there comes a point where the positives start to outweigh the negatives on underlying earnings.
Swati Pandey (Bloomberg)
Do you have a question there?
Guest
Deputy Governor, I run a trading fund. I just want to discuss quantitative easing, so the various aspects of bond buying, your curve control and so forth. Do you consider those superpowers may be a little bit too nuclear to invest in one person to decide the timing and the quantum of applying them and removing them? And also, do you think appropriate measures, which is what the Reserve Bank Act really … do you think lawmakers really had any idea of what they were vesting in the Reserve Bank?
Michele Bullock
I didnt quite catch the last question?
Guest
The last bit is, all I can see in the Reserve Bank Act is that appropriate measures will be used to achieve its charter, so do you think lawmakers really had any idea of the inflation potential of the powers that theyve vested in the Reserve Bank?
Michele Bullock
No, I wouldnt call them superpowersand, in fact, they helped at the margin. But, really, its the policy rate that does the work for the bank - that is the main tool. I wouldnt think of the other things as superpowers, Id think they were just things that, at the margin, we were trying everything we could. Think back to March 2020, and people seem to forget it was, we were facing a disaster, 15 per cent unemployment; GDP was going to drop by 10 per cent; there was going to be a morgue in the Domain for all the dead people. You know, this was catastrophic. In those circumstances, these were things at the margin that we thought might assist to help the economy. Did the lawmakers understand that these sort of … no. I would think in 1959, when they drafted the Act, they didnt have any idea of the sorts of challenges and the sorts of tools that the Central Bank might have to use.
Swati Pandey (Bloomberg)
One more question.
Hans Lee (Livewire Markets)
Good afternoon, Deputy Governor. Hans Lee of Livewire Markets I note in the review you guys released this morning theres talk about how the ultimate cost of this program may not be felt until 2033. So Im curious—well, two questions from me -Im curious whether there was any consideration of a more active approach to quantitative tightening, like there is at the Federal Reserve, and, secondly, whether the RBA has, you know, best- and worst-case scenarios around how this will all, you know, develop and pan out and, if so, what are they?
Michele Bullock
Sure. So, yes, the board did consider the issue of whether or not to actively run down the portfolio. It decided in the end not to and, I think, for a couple of reasons. The first is, its at the margin really, as I said earlier. The main impact … were not constrained on the upside like we are on the downside, so we couldnt lower the interest rate any further but we can move the interest rate up. So that is the main tool. And thats why we havent categorically ruled out, but weve said currently we have no plans to sell before maturity. So that would be the reasons for that. But, yes, its been actively considered. Sorry, your second question was …
Hans Lee (Livewire Markets)
Whether the RBA has, you know, a best-case scenario and a worst case scenario developed for this run-off process, this quantitative tightening process.
Michele Bullock
Theres a little bit of that in the Bond Purchase Program Review where we do the scenarios for various interest rates and what that might imply for earnings from the bond purchase program, and theyre the numbers that come out of—it might end up—it could end up costing anything, I think, between $58 billion in the worst-case scenario and $20-something billion in the best-case scenario for interest rates. One thing I would point out though is that, and I think this shouldnt be underlooked—is that the economy, because of all these extraordinary measures, the economy has done very, very well. I saw this morning in the paper that the budget deficit is looking a lot better this year, and one of the reasons is because welfare payments are down and thats because unemployment is at its lowest level in 50 years, and the bond purchase program as part of the package helped to contribute to that. So just considering the financial loss, if you like, in isolation, I dont think is particularly helpful. I think you have to think about it across government and across the economy.
Swati Pandey (Bloomberg)
Will you take one more question?
Michele Bullock
Ill take one more.
Swati Pandey (Bloomberg)
Okay, one more question, the last.
Guest
Deputy Governor . The bank is reviewing its communications with the Australian people at the moment. Should the RBA adopt what the US Federal Reserve does and have a press conference after every cash rate decision?
Michele Bullock
After every cash rate decision, meaning whether we do anything or not?
Guest
Correct, yes.
Michele Bullock
Okay. Well, that would be interesting. That would mean 11 press conferences a year and …
Guest
Well be there for them.
Michele Bullock
I suspect the quid pro quo of that is thered be no speeches, because well have already been out there completely overexposed. Look, ultimately, we do want to be accountable and we do want to be transparent. Our view at the moment is that its most appropriate for us to have press conferences when we have something significant and important to say but not just because. And thats our view at the moment and I think wed be putting that view forward, but theres room for alternative views. And, as you know, theres a review of the Reserve Bank going on at the moment, and that may well be something that they will consider.
Guest
You have had four 50-basis-point cash rate rises in a row though and no press conference, apart from one.
Michele Bullock
Yes, but weve had plenty of speeches.
Swati Pandey (Bloomberg)
Okay. Thank you so much, Michele. Thank you for your time and we look forward to hearing from you more and to hosting you again at our offices.
Michele Bullock
Thank you, everyone.