Transcript of Question & Answer Session The Virus and the Australian Economy

My sense is, from listening to the commentary of the Chinese policy makers over the last few weeks, they have put economic rebound back up to the top of the agenda, and ahead of considerations around debt sustainability and the like. So, that had been a major focus of the Chinese government for the last few years, but I do think if you look at the rhetoric that's coming out of China at the moment, that they are very much focused on getting the economy back to full capacity, working at full capacity. That's the priority at the moment, and the announcements they've made indicate that that will involve a decent amount of fiscal stimulus. So, I think the priorities have changed some over the last month or two.

The RBA cut the cash rate to a record low 0.5% last week. Look, there's been a lot of commentary about the effectiveness of monetary policy, whether that was a good idea as a partial response to the coronavirus. You outlined some of the reasons in your speech, but what would you say to the sceptics? We've heard some of them here in the audience over the last day or so about wondering why the RBA's cutting, what good this is going to do for the economy.

So, monetary policy still works. If you look at the reductions last year, they are transmitting through to the economy pretty much the same as they ever had, and while as I said in my speech, we can neither obviously make people better, health policy is clearly the key priority at the moment. We can't do anything about that. We can't do anything about the effect on the supply side of the economy, but we can help sustain demand higher than otherwise would be through this period of disruption that we've got ahead of us.

Through the channels I had talked about earlier, the exchange rate still clearly works. Putting cash in people's pockets through lower interest rates in net terms is still clearly there and we saw the effects of that through the reductions last year, and don't have any reason to suspect it'll be any different now.

Financial markets are pricing in another imminent RBA cash rate cut to 0.25%, which as the Governor and you have said is the assumed lower bound, i.e. cash rate probably wouldn't go or couldn't go any lower in Australia without having disruptive impacts on potentially banks and it might be counterproductive. So, if we take that that an RBA rate cut is on the cards, then you're potentially looking, as the Governor has disclosed publicly, potentially a quantitative easing, buying government bonds. He said that would be the first step if they ever went down that path. It's not the bank's preference, but it's an option available to them. Is that a realistic and more plausible scenario now that we're fighting this coronavirus crisis?

As I said, there are scenarios where we're certainly going to have to consider that, absolutely. I suppose, what we're trying to achieve there, and Phil talked a bit about this last year, is we're basically acting in the government bond market as necessary to keep the risk-free rates low. So, our view would be, "Well, we need interest rates to be low for a sufficiently long period of time to see unemployment decline, employment grow and inflation rise to be sustainably within the inflation target."

So, we would talk about the likely future path of interest rates, also generally known as forward guidance. To validate that, we'd … be operating in the bond market as necessary to keep government bond rates consistent, or the risk-free curve consistent with that, our outlook for interest rates. So, that would be the options that we would be considering. I might also mention, as we've said before, at the moment we don't see material disruptions in financial markets. If that were to change, we obviously have the capacity to act in the market like we did back in 2008 in terms of ensuring sufficient liquidity to the market. We don't see the need for that now, but obviously as circumstances change, that may also need to change.

Just on that potential government bond QE, we've seen some commentary, some market speculation about the shape or form that could potentially take. The Federal Reserve, for example, said, "We're going to buy X billion dollars of bonds a month." That's more of a quantitative, and wherever the bond yields end up, they end up, whereas the Bank of Japan for example has more gone on a price basis, or a price signal to the market, yield curve control and actually set targets for their government bond yields to hit for the central bank and the market to hit. Does the RBA have any thinking about which direction it might prefer on that front?

Well, as I said a minute ago, I think it's easier to think about it more in terms of the price sense than in the quantity sense. So, if you think about the transmission of … and it's more analogous to the reduction in the cash rate. When we reduce the cash rate, it gets transmitted through the whole yield structure and the whole interest rate structure in the economy. If you're thinking about trying to keep the front end of the risk-free curve say low for a period of time, that's much more analogous to an interest rate reduction.

So, that's very much to the way you just framed it, more looking at the price, which is what we do when we're moving the cash rate around. So, it's very much more analogous to that than a quantity-based program where you say, we'll buy bonds and see what happens. It's more, "We will act in the government bond market as necessary to ensure an interest rate path consistent with what we think is necessary to get the economy back in a sustainable place.’

So, in other words, you already have a cash rate target. You set the overnight cash rate with this … potentially if this day was to come, you could potentially see yourselves setting a target for the government …

Or at least an objective.

An objective, yeah. Okay, excellent. Just on credit markets, you touched on it there; not a lot of concern at the moment. Actually, you seem to feel like there's enough liquidity in the system. You're obviously monitoring it closely, but not a deep amount of concern, even though there's been a lack of primary bond issuance in the US and global bond markets in recent days. It's more about people sitting back on the sidelines and waiting for the calm to come about?

I think in terms of the lack of primary issuance, I think that's been the main driver there. There hasn't been an absence of issuance. There have been days including last week where there was … I think last Thursday, there was a decently large amount of corporate bond issuance, including by McDonald's in the US. So, there has been a large amount of price volatility in some parts of the credit market, particularly in high yield. My general sense, from talking to participants around the world, is that it's been more of a repricing story rather than a large selling story; not in every market, but in a lot of markets. But there has been a decent amount of repricing.

As I said earlier, the liquidity environment in bond markets, and markets more generally, is different than it was 10, 12 years ago now. That's I think been well known for the last five or six years. It shouldn't come as a surprise to people. How it plays out in times of stress like we've seen over the last few days is yet … we're only just seeing that now. But it is a different liquidity environment in markets than it used to be, and I think people who participate in those markets should be aware of that and should've planned around it. But as you say, on the whole, yes, there has been a decently large movement in some prices at times in some parts of the credit market.

But my overall sense is that not a huge amount of stress. We haven't, and as I said … also, in our daily operations, in our market operations, we haven't seen any particular sign of distress in the Australian markets. Talking to my counterparts in other parts of the world, that's their general sense in the short-term money markets there, too.

We've got a couple of more minutes left, just for a couple of quick questions from the floor. If there's anyone who has a burning question for the RBA Deputy Governor, maybe just quickly raise your hand.

We also have a few coming through on Slido. A question from Robert. Do you expect the low exchange rate tied with low interest rates and a volatile share market to provide a double kicker to the housing market for both foreign and domestic investors?

I'm not sure. If I've got an expectation about … if I'm really uncertain about the future and particularly about my income into the future, I think that's not going to encourage me to rush into the housing market. So, I think that's potentially going the other way. At various times, the low exchange rate has seemed to encourage a bit more foreign demand. That sometimes happens. Sometimes it doesn't. I'm not sure that's so much the issue. But as I said, the share market's falling because of very large uncertainty about the future. It's not obvious to me that that makes housing that much more attractive an asset than shares. The same degree of uncertainty and risk aversion I would've thought would be prevalent in the housing market, too.

It doesn't help me know when to sell my house, but okay. A question from []. What's your advice to households and SMEs who are clearly worried by the current global outlook?

I'm not sure I'm in a position to give advice really, but as I said earlier, the fiscal and monetary policy are working to support the economy to get through this episode. As I said, and I think as the prime minister said yesterday, in the end, we'll come out the other side of this. The virus does have a finite life. The disruption on the way through may be reasonable. But both the fiscal policy actions, which I suppose we'll see the details of soon, as well as our own actions in acting to try and support employment, support incomes through this period, and so I'd hope people will take some comfort from that.

If there are no other hands sprouting up, one final question from Slido; how do we get out of the cyclical environment of lower for longer rates creating inflated domestic asset prices?

I won't necessarily take the last part as given, but I'll talk about the first part in the sense that if rates are lower for longer, then asset prices are … I think you can validate where they are. But it's dependent on the answer to the first question, which to some extent was what I was going to talk about before I changed my talk which is investment. So, why are rates … where they are is because there's some pretty big secular forces going on out there. Some of them are demographics. I was going to say, we can't change that and we might be changing that at the moment. Some of them are demographics, that the ageing of the global population is, and increasing global savings. So, that's one of the large secular forces out there.

But the other side of that is investment and it's not just a story here, but it's a story around the world - and what I was going to talk about, which I'll save up for another day - is that investment has been low outside of the resources sector here, but also around the world for a long period of time. So, when you've got an environment of a large amount of savings and a low amount of investment, that's going to lead you to global interest rate structure. So, the solution really comes down to … one part of the solution very much comes down to investment. If we saw much stronger investment around the world, then that would at least be one reason why I'd expect the interest rate structure to shift out of the low structure it's in at the moment.

That'll be a good segue to our next panel, because it will be all about productivity which is obviously highly linked to investment as well. Look, Dr Debelle, thanks for much for your time, this morning. A great speech. Thanks for changing the topic to fit with the times and answering a few questions here as well.

Okay, thanks, John.