Transcript of Question & Answer Session Policymaking at the Reserve Bank

Now for some questions. There are two microphones, so if you could just get Alex and Elle’s attention. Make sure that you wait for the microphone because of our virtual attendees, we do need them to hear the question as well.

Thank you, Michele. That’s a timely discussion about how the Reserve thinks about things and it’s not just data, it’s human judgement as well. So I’m keen to hear how you’re using data and technology and how you might be thinking about or are using behavioural economics as well as the economics.

Yes, I think there is an element of thinking about behavioural economics in everything we do. I think one of the important behavioural sort of issues at the moment we’re grappling with, which is very important, is: what are consumers going to do with the large payment buffers, the large savings buffers they built up … This is actually quite an important issue because they could go one way or the other, they might choose to continue to save it all, or they might choose to spend it. They might look at their household budgets and say,’You know what? I’ve got all this saving. I’m going to run it down.’ Which way they go is going to be quite important for the way the economy develops, I think. So this is one of those uncertainties where behavioural economics might help you, but it’s very uncertain. So it’s just another reminder that economics isn’t driven by very, very precise models, behaviour is really important here. And I think how … as I say, this is going to be one of the key behavioural responses that is going to colour what happens in the future.

Any more questions? This is a great opportunity while we’ve got Michele on stage.

Hi, Michele. The banks in Europe and the US continue to increase interest rates. Even if we have a shallower recession and we get inflation under control here, will we not need to follow their lead in order to preserve the value of the Australian dollar?

Yeah, it’s something that we watch, obviously, but we’re not only driven by that. I’d make a couple of observations there. First is that everyone is focused on the USD-AUD exchange rate. At least a good part of that is due to a general strength in the USD itself, so everyone is declining against the USD. If you look at us on a trade-weighted basis, we’ve declined a bit but no way near as much and that’s probably the more important thing for inflation in Australia. So, yes, we will have to watch that. But it’s also true that we need to be cognisant of our own economic conditions, and I think we still feel—and I know the Governor has used the term ’narrow path’ on a number of occasions—we still feel that there is a path for us here where we can get inflation down, not go into recession, preserve most of the gains in employment that we’ve had over this period, which has been absolutely outstanding for employment. So, yes, we’ll need to watch the exchange rate, but it’s also true, I think, we need to keep a very close eye on our own domestic economic conditions.

Thank you. We’ve got time probably for one more. Is there any …

Hello. Thanks very much. One of the things that I think a lot of us in the room have seen is, when you talked about changing payments that mobile devices have grown at light speed even in the space of a couple of years and, to a certain extent, the device manufacturers or operating systems are somewhat the payment rails of the 21st century, as some have said. How are you and the team thinking about this going forward, as you think about the future of the payments system?

I think at the moment we feel, as I said, that there are quite a number of participants in the payments system who seem to technically be outside the regulatory net. So our feeling is that they do need to be brought back within the regulatory net, and our focus here is on competition and efficiency. And, if there are certain parts of the payments system that are not subject to competitive pressure, then we’re going to be looking at them closely and figuring out whether or not there are things we need to do to make sure that competitive pressure is brought to bear, because everyone taking a clip of the payment on the way through, it quickly becomes pretty expensive and competition is the way to make sure that doesn’t happen. So that’s a fairly broad answer, but that’s what we’re thinking about.

Is yours quick?

House prices. So, obviously, you talked about the build-up of household savings being a driver of inflation, the other one is the wealth effect from the increases in property prices. There’s a lot of commentary around at the moment about the fixed-rate clip that’s potentially coming. To what extent does that come into the thinking?

It’s certainly comes into the thinking and, as I said, it’s interesting to think about how people will behave because of those buffers. We know the people who’ve got the buffers are the people often with the big mortgages too, so they’ve been using low interest rates to build up. From a financial stability perspective, it’s not going to be an issue for the banks, the banks are well covered. That’s not to say that there aren’t some households that are going to be coming under pressure. And I think house prices, I would say’house prices’ is interesting because, a couple of years ago, everyone was complaining they were going up, now everyone is complaining that they’re coming down, so we really can’t win on this. Even so they have started to come down, they’re still 20 per cent above where they were … So, yes, the wealth effect is important; that’s going to be important for thinking about the behavioural impacts. The’buffers’ people have built up on their mortgages are going to be important. And I think we do have to watch that there is a vulnerable edge on this and just making sure that those households are not … They’re going to be hit but, at the moment, the advantage they have is that they probably have equity in their home, they’re not going to be underwater, which helps in terms of stability and also their ability to get out of their particular situation. So they’re some of the things, I think, that we’re thinking about.

Thank you so much, Michele. Please join me in thanking Michele.