Transcript of Question & Answer Session Australian Fixed Income Securities in a Low Rate World

We've had a slight technical hitch with the electronic system. It's up and running, it'll be up and running imminently but we're going to have to go old school with this one. A couple of questions came in that I'll ask now, and if anyone's been trying to ask a question, please put your hand up, we'll bring you a microphone. Let me start with the first one that we did get. Chris, what are the RBA's views on the extent of super normal liquidity that's found its way into the Australian Dollar market? I guess that's from Global QE and so forth.

Well I think if you go back quite a few years ago to when QE was at its height, even when it was really starting to kick off, the point we made at that time was - that was having an important influence on the Australian economy. And that was occurring primarily through the response of the exchange rate. The Australian Dollar was relatively appreciated and for a time, and I even gave talks some years ago which talked about it, seemed higher than you might have otherwise thought, based on what was happening to commodity prices.

Indeed, there was a time when commodity prices had already started to come off, but the Aussie Dollar hadn't responded very much, and we highlighted those times. That's turned around a bit, because at least there's been some moderation in the extent of expansion of the balance sheet of the ECB, and of course, the Fed is now on this very gradual path of reducing its balance sheet.

But more importantly, I think the Aussie Dollar has come down from those much earlier highs, and that's consistent with a number of things, but particularly the fall in commodity prices. It's had an effect. I think that effect, the largest effect, is behind us.

Anything from the floor before I ask the next one that came through?

Chris, quick question on bills LIBOR. Obviously, we've seen a kick up in bills LIBOR markets around the world. Arguably there may be an associated shift in BBSW here. Is this on the radar? Does your office have any views on drivers here and any expectations going forward?

Yeah, we've definitely noticed certainly the pressure on US LIBOR relative to say OIS. It probably hasn't moved that differently from say, US treasury bills relative to OIS. I think that's part of the answer of what's happening. There are two things here to say. One is, the fiscal package means the US is going to be issuing more debt, and then the end of the debt ceiling around the turn of the year, which had led the Treasury to hold off issuing debt, and they need to issue a lot more, they've decided to issue a whole lot in this first quarter of the year.

So, there's this big digestion if you like, of that issuance occurring. That's pushed up US T-Bills. There's a lot, and the other thing is that they're issuing at very short tenors. Those are the facts, and that's pushing up US T-Bills, and I think that's had some effect on this US LIBOR rates.

I think the other thing that we understand is happening, and I think is fairly well known, but their quantum are hard to pin down, is that some very big US corporates that have funds and liquidity in US Dollars, but they're not domiciled in the US. These big particularly tech companies are .wanting to hold much more liquidity than they have in the recent past, because they're trying to work out what to do with these funds which are held offshore, given the changes in the US tax arrangements.

They've come down to the very short end of the liquidity spectrum, and they're pulling funds out of that three month US LIBOR. So again, that's contributing to this. How long this lasts? I'm not sure. Partly I think some of that … Both of these things are potentially shorter term, so some of these pressures might ease a little bit in the future, but don't make that as a prediction and go and trade on that basis.

There's another question from the back here I think. (Background) I've got one here.

Sorry, you're suggesting would we move in increments other than 25?

Well, it's not particularly for me to say. I mean, the first thing to just preface this is, the Governor's made it very clear that even though we're making progress on bringing unemployment down and inflation up, that progress is very gradual. That means, progress means the next move is more likely to be up than down, but the gradual part of it means not anytime soon. I'll just preface these remarks with that.

I mean, it's hard to know exactly the circumstances that would warrant that, but there is no reason why we would tie our hands and say they have to be in particular increment sizes. I don't think I can add much more than that. I mean, other than the Bank and the Board are going to be quite conscious at the time, and link this to my earlier remarks, at some point in the future, about the fact that they're cognisant that household debt levels are high, and therefore that some households at least might be more responsive to increases than otherwise. Thanks.

There's maybe time for one more. Just a question here? Get a microphone over to the middle here.

Hi Chris., Michael Heath from Bloomberg News. I'm just wondering about your thoughts whether global markets are perhaps under-pricing the risk of stronger global growth?

Thanks Michael. Good question. I'm not sure they're under-pricing the risk of stronger global growth. I think the question is or there's a risk, and it's not clear that they're under-pricing it, but you saw it and I gave a hint of that in talking about the recent episode in US equity markets, that the expectation is that inflation will remain low for a good time. That interest rates therefore will remain quite low, and many analysts have the expectation that profits growth can be sustained at reasonably elevated levels for a good time.

Well, it's hard to sustain all of those things for an extended period of time, and I think the good growth that we're seeing, the low levels of spare capacity, particularly in say, the US labour market, does raise the risk and this is what markets focused on recently, that inflation pressures will pick up.

We had a very weak bout of inflation in the US last year, but that's sort of behind us. If you look at the core PCE measure of US inflation, it's back up around 2% on a six month-ended annualised basis. So are they under-pricing it? Maybe. I think what the recent bout of volatility showed us in equity markets is that you shouldn't count on very low volatility being sustained with low inflation, low interest rates, and strong profit growth. It's hard to have all of those things be sustainable for a long period of time. Thank you.

Great. I think we'll leave it there. I'm sure everyone will want to join me in thanking Chris for making time to speak to us this morning. Thanks very much.

Thank you.