Transcript of Question & Answer Session Issues In Economic Policy

Guest

Hi thanks Governor, one area or one region you didn’t mention except in passing with reference to China was Asia, and of course Asia’s a lot more than China and the rest of the region does seem to be having some difficulties with maybe some excess leverage, a weaker global trade cycle. What are your thoughts on the extent to which what’s going on in the rest of Asia is directly relevant for Australia and policy settings thanks?

Glenn Stevens

I agree that Asia’s much more than just China, I think that’s very important point and the point you make that in a number of instances there’s been a run up in leverage in recent years and so all of that working that through is still a work in progress and all of that’s relevant to Australia and as the global rate cycle enters a new phase with the US starting to lift off apparently by the end of the year some of that will be tested so that’s a thing to watch. I don’t really have any more to say about that today, we’ll be publishing some updated forecasts in a couple of weeks, thanks.

Bill Evans (Westpac)

Bill Evans from Westpac. Governor I wanted to sort of speak a little bit more about that labour market trend growth topic that you so interesting covered. At the moment the Reserve Bank’s forecasting 3¼ per cent growth for next year, up from 2½ per cent this year, and we generally accepted that the 3¼ per cent was trend and we also accepted that you needed to get to trend to stabilise the unemployment rate. If in your deliberations as you implied may be the case, you conclude the trend is in fact lower than 3¼ per cent would that mean it’s okay to – not to need to force growth back to 3¼ per cent or would it be that there is still a lot of spare capacity in the labour market and policy should be focussed on reducing that spare capacity?

Glenn Stevens

I think what the labour market data are saying on their face is that spare capacity’s no longer increasing, if you literally accepted the unemployment rate hasn’t moved for a while, so it hasn’t increased by as much as we had anticipated if those data are correct, there’s still some spare capacity there though and it would be a desirable thing over time to use that spare capacity, I think that would be a reasonable objective for macroeconomic policy. How quickly you can do that of course we could debate, but I think over the horizon of several years it would be okay, it would be desirable in fact to have above trend growth for a little while to start to bring the unemployment rate back down and so far as we’re able that’s something that we should be interested in doing.

Rory Robertson (Westpac Treasury)

Governor Stephens Rory Robertson Westpac Treasury. You’ve used this occasion in recent years to push back some of the public gloom, I think one of your speeches was the glass half full …

Glenn Stevens

Not always with success yes.

Rory Robertson (Westpac Treasury)

… a glass half full, a lucky country, but today you’ve highlighted some of the brighter recent news on employment and unemployment going flat at 6 per cent, house prices sort of rising strongly so there’s a lot to be happy about. You’ve talked about you know the interest rates are out there for borrowers are pretty well the lowest anyone’s ever seen and you’ve talked about the need for you know financial stability over the medium term. My summary of all that is that you seem decidedly unenthusiastic about cutting rates below the current record lows, and my question is does that sound about right or should – or should monetary policy be pushing harder to get unemployment well down below 6 per cent? Thanks very much.

Glenn Stevens

Well I think … where do I start. I think there is some better news of late and I think that should be said but I also would refer to remarks I’ve made in the past about the limits of what monetary policy over a short period can expect to achieve in the environment we’re in, so I think we’ve got the balance, the balance I was talking about in the talk, I think we’ve got that right at the moment, but of course we make a new decision each month and you’ll have to wait to see what we have to say about that for a couple of weeks.

Matthew Johnson (UBS)

Matthew Johnson, UBS. Governor thank you for your speech, I wanted to ask some questions or a question about investment. It’s fair to say that investment globally since the financial crisis has been very disappointing and the IMF wrote an interesting chapter about this in the most recent Board Economic Outlook. During your speech you emphasised that you thought that the terms of trade were important in Australia as part of that story but I’d like to respectfully point out that it’s been very disappointing everywhere in the world and I wanted to know why you think it’s been so disappointing? And then in thinking about Australia what happens to investment in Australia if the terms of trade goes back to average, which is what everyone thought it would do before we decided we believed in the China boom?

Glenn Stevens

Well just on the terms of trade in investment here you’re quite right that capital spending at a global level has been weak for some years and that is an issue, a conundrum that many people globally are talking about and we’re part of that I suppose perhaps in the non-mining part of the economy. In the mining part I think it’s pretty clear that the terms of trade event had you know we had an unprecedented pick up in capital spending there which is now as I say on its way down. What will happen from here? Well I hesitate to make a forecast, my view had been I suppose still is that the level of CAPEX outside of the resources sector is very, very low and at some point that’s going to have to pick up just through the fact that capacity will be starting to run down. But that isn’t going to happen as soon as I had hoped, if we believe the capital expenditure survey, I’m not sure whether we should, but if we do non-mining investments probably going to fall actually over the coming 12 months. So as we’ve often found in the past you can wait a long time for the capital spending to pick up and I think that’s because businesses wait to be more confident that there’s the demand to use the extra capacity that they may have been thinking of putting in place. That dynamic’s not new but it’s a rather drawn out event on this occasion. Beyond that I don’t really have any words of wisdom to impart on global investment, my observation is this is part of another conundrum which is globally we have a lot of financial risk taking and not very much real economy risk taking, what you think about that, why you think it’s happening, they’re very important questions but I don’t have the answer.

James McIntyre (Macquarie)

Thanks, thanks Governor. James Stephens, oh sorry James McIntyre Macquarie Bank. With that Freudian out of the road, you’ve articulated in the Minutes yesterday also articulated the decline in population growth and some of the more high frequency data that some of us here in the room are prone to focus on indicates that that may have been slowing further. That does have some implications for a further slowdown in potential growth if it does persist, but I can’t help thinking that lower potential growth rates would generally be associated with a lower longer run potential or neutral interest rate. In articulating that our potential might be slow have you just articulated the case for rates to be lower for longer?

Glenn Stevens

I think we’ve already said that normal or neutral in the world we’re in looks like it’s lower than it used to and that’s likely to be the case for a while. Let me leave that at that without offering a precise calibration.

David Rogers (The Australian)

David Rogers from The Australia, Governor. As you know there’s always one question on the Australian dollar, so would you say you’re broadly happy with the level of the dollar now or is a further fall seem likely and necessary?

Glenn Steven

I’d say it’s adjusting, as you’d expect.

Michael Potter (Uniting Care)

Governor Michael Potter from Uniting Care. I was wanting to draw out your views on productivity. You’ve mentioned in your speech that labour market outcomes are better than expected but growth is not, that implies that productivity outcomes have been worse than expected. And everybody has been commenting over the past you know many years that productivity growth will improve when the mining boom – into the production phase of the mining boom, does this mean we are still waiting for productivity growth to occur or is there something else going on? Are we actually seeing a secular decline in productivity growth?

Glenn Stevens

Well arithmetically what you say must be true if both bits of the data are correct in some sense. Whether that’s the right interpretation or whether some of the possibilities I outlined earlier might turn out to be the case that remains to be seen. My own view about productivity is my guess is firms are trying much harder in the past few years than they have been before that to get costs down to get productivity up. I think all our liaison tells us that and I think that’s good so I’m in that sense without being able to prove it all from the figures, certainly, I’m a little bit more optimistic about productivity than I might have been a few years ago, but that’s a hypothesis really and it can’t be any more than that, it’s just an observation based on a lot of feedback that we get. Certainly productivity really is everything in terms of potential growth and potential growth as I have said I think is the thing we’ve got to be trying to focus on lifting.

Guest (ABC)

Masker ABC TV Governor. Just another media person searching for some content I think.

Glenn Stevens

You have my sympathy.

Guest (ABC)

Well they’re meeting across town discussing tax, you did mention reform in your speech, one thing that seems to be – one thing that people seem to agree on is we need to find the way to fund the future cost of healthcare and education. Two solutions I suppose that have been put forward are increasing the Medicare levy and doing something involving the GST, I’d like to know what you think would be preferable given that both in some ways might represent some sort of fiscal contraction on the GST side if you provide too much compensation for the increase in the GST you then leave less money for reducing the burden of healthcare but on the other hand if you hit households too hard then that’s – you’re hoping households will actually help us through the transition which could take a number of years. What sort of impacts would those two solutions have on the economy?

Glenn Stevens

Well that’s pretty complex and I’m not going to buy into tax reform or fiscal policy in any material way here. I would assume that by the way there’s two things which I think are being conflated in discussion out there at the moment, there’s tax reform which is different structure of taxation and then there’s whether we need more revenue if we can’t lower spending; they’re at least conceptually distinct though they’ll perhaps be addressed together. But I mean if they are addressed Phil, presumably it’s over a lengthy time horizon in which case I don’t know that there’s going to be big impacts from a kind of cycle management point of view that we would need to worry about, I could be wrong about that but my assumption would be that we would be talking if these changes were to occur about them being phased in over a reasonably lengthy period. That’s the best I can do on that today.

Craig Skitolif (Global Management Group)

Thank you, Craig Skitolif from Global Management Group. Post the GFC the RBA liked bench mark interest rates from 3 to 4.75 per cent it attracted foreign capital and the Australian dollar averaged through 2010 through to 2013 nearly parody. This decimated a lot of export earnings in Australia including mining, education and tourism, it also affected bankruptcy of many small, medium and large enterprise businesses during that period of time here in Australia. During that period I wrote to you on multiple occasions mentioning the evils of the over inflated Australian dollar as a result of high monetary policy compared to the rest of the world. This was also backed from various political and editorial and journalist commentators at the time. Given the benefit of hindsight was that a wrong decision of the Reserve Bank during that period to have hiked interest rates at the same time global interest rates were coming down.

Glenn Stevens

Well let’s look at the outcomes. Here were are what five years on we’re achieving the inflation rate, the unemployment rate’s a little high, the economy’s growing and we’ve got policies set appropriately for I think for the conjuncture and the currency’s done what it was going to do which is it went up when the terms of trade were at their highest level for 100 years and it’s come down as they’ve come down. I think myself the system was working, that’s my view.

Sue Lennon (ABC)

Governor it’s Sue Lennon from the PM Program on ABC Radio. APRA of course announced this week new capital requirements for the big banks against their mortgage books do you think that will see a significant increase in home loan interest rates, and if that happened would that be a good thing, if it dampened property prices in Melbourne and Sydney?

Glenn Stevens

Well the changes to the risk rates on housing that is a response as I understand it to the Murray Inquiry which said that should be done for competitiveness grounds. So I would imagine it will result in some rise in mortgage rates from the major banks, it’s supposed to that’s the point, this was about redressing a perceived competitiveness landscape point and that was the whole idea of it as I understand it, that’s for the banks to decide of course what they do, but if they made that adjustment no one should find that surprising or controversial. The whole point of it was to change the competitive landscape between the majors and the others, wasn’t it that was the idea. You can’t do that unless some prices adjust.

Sue Lennon (ABC)

And just to follow up would that be a good thing if it lowered property prices in Melbourne and Sydney?

Glenn Stevens

Would it what sorry?

Sue Lennon (ABC)

Would it be a good thing?

Glenn Stevens

I’m not commenting on that.

Trent Clyde (Sky News)

Governor Trent Clyde from Sky News. You pointed out that when the US does move on interest rates it will be very well telegraphed. Would the RBA rather wait to see when they do move given that it will have a likely impact on the Australian dollar and may – may not mean that you would in turn have to lower interest rates in Australia?

Glenn Stevens

Well I think all we can do is make our decisions month by month on the basis of the information we have and I think the Fed’s telegraphed the way they’re thinking about as clearly as you can I think that’s very welcomed and so that’s the information we have and we’ll make our decisions month by month I don’t really want to you know speculate about whether that means we won’t wait or not to do something we might have thought about doing, no comment on that. Sorry to end with no comment but there we are.