Transcript of Question & Answer Session Responding to the Economic and Financial Impact of COVID-19


Thank you. Your first question comes from Vesna Poljak from AFR. Please go ahead.

Vesna Poljak, Australian Financial Review

Thanks. A question for the Governor. Are you frustrated by the action at the long end of the curve and would you say the 10-year yield where it is today poses a problem for your monetary objectives?

Philip Lowe

No, I don't think it poses a problem at all. The bond yields have been very volatile over the past couple of weeks. Actually, all financial markets have been very volatile. Liquidity conditions in most markets are very poor, bid-ask spreads are wide, the intermediaries who are intermediating between the buyers and sellers don't have very much risk capacity and so they're not playing their normal role. At the moment we're seeing huge amounts of volatility and we've seen that again in the 10-year bond yields this afternoon.

I would expect as things settle down and people see us intervening in the market, the bond yields right across the term structure will decline.

We are prepared to buy government bonds right across the maturity structure. While our focus is very much on the three-year yield – that's where the target is – we'll be buying bonds right across the maturity structure as there's a higher degree of substitutability between bonds. I think we have to give this time to settle down.


Thank you. Your next question comes from Michael Roddan from The Australian. Please go ahead.

Michael Roddan, The Australian

Hi Phil, thanks for taking questions. Just wondering, the meeting that took place yesterday, was that the entire RBA Board and was that in Sydney? Could you explain why it took place yesterday but we waited until today for an announcement? Was that just planning? I'm just wondering about the timetable here between events.

Philip Lowe

It was the entire Reserve Bank Board and for the first history in our Board we had members coming in through video conference. We had four members in the room and five through video conference and that worked remarkably well. The Board meeting went until early afternoon and we didn't make the announcement until today because we wanted to coordinate with the government, with APRA, with the AOFM. As you'd appreciate, doing that coordination takes some time. There's nothing untoward there, we just took time to make our decisions, then we coordinated with other arms of policy, and we're making the announcement today.


Thank you. Your next question comes from Swati Pandey from Reuters. Please go ahead.

Swati Pandey, Reuters

Hello Governor. I've been looking at some commentary that's come out since your decision. While the move has been welcomed, some economists have said that the RBA will have to do more. My question is, what is in the RBA's toolkit if it has to do more? What else can the RBA do next?

Philip Lowe

Well, I'm not going to speculate on what other measures we could take, other than to make the point that really nothing is off the table. We're in extraordinary times and we're prepared to do whatever is necessary to make sure funding costs in Australia are low and the supply of credit is there for Australian businesses and households.

We're working constructively with the government, the banks and the AOFM to make sure that's the case. We feel like at the moment we've done enough. If it turns out not to be the case, there are other measures that we can consider, and I don't want to speculate on that today. But what I want to say to you is we will do whatever is necessary to make sure credit is available in Australia to businesses and households to get us through this difficult period.


Thank you. Your next question comes from Stephen Halmarick of Commonwealth Bank. Please go ahead.

Stephen Halmarick, Commonwealth Bank

Thanks Governor. You mentioned that you would look at changing the 3-year target, or removing the 3-year bond target before you decide to increase the cash rate. Just wondering what conditions would need to be in place to remove that 3-year bond yield target and then how long before you might change the cash rate?

Philip Lowe

Well, we've only introduced that target today, so I don't want to start speculating on what the conditions are when we might remove that target. But as I said, I think we would lift that target before we were going to increase the cash rate. To get to that point, obviously the virus will have to be contained and we'll have to be in this recovery that I talked about and we'll want to be confident that we're heading back towards full employment and we're going to achieve the inflation target. I'm really looking forward to those days when we can say that, but I don't want to speculate on the precise conditions yet, I don't think that's appropriate.


Thank you. Your next question comes from Sally Auld of JP Morgan. Please go ahead.

Sally Auld, JP Morgan

Good afternoon, Governor. I actually had two questions, if that's okay. You talked about the purchases of government bonds to help the smooth functioning of the market and said they were very similar to purchases you might make if you were intervening in FX markets to achieve a similar objective. Often with FX intervention, the central bank sterilises those purchases. So are you going to do the same with the purchases of government bonds that you make?

Philip Lowe

The answer to that is no. When we purchase these bonds, it will lead to an increase in settlement balances and as a result of that settlement balances in the system are going to increase. So we're not attempting to sterilise it.

We've had settlement balances in the past around $2 billion. If the banks take full advantage of the term funding scheme that will go up at least $90 billion and I don't know exactly how many bonds we're going to have to buy in the bond market to achieve the target, but that will add to settlement balance as well. I think we're going into a world now where settlement balances at the Reserve Bank will be well over $100 billion.

Sally Auld

Thank you. My other question was you spoke in November about the effective lower bound in Australia and you said that it was 25 basis points largely because the interest on excess reserves at that stage was a difference between the cash rate and 25 basis points. Now that you've changed the bottom of the corridor, is it fair to say that the effective lower bound for us is now zero?

Philip Lowe

No, I haven't changed my view on the effective lower bound for the target cash rate.

I don't think it's any accident we're seeing, as I said in my prepared remarks, in the US, the UK, New Zealand and us, we're all at 25 basis points. The focus for us now is not reducing or changing the cash rate – I think we've done as much as we can there – but it's taking other measures that support low funding costs in Australia. That's one reason we are trying to lower the government bond curve because that provides the benchmark interest rate for a lot of other interest rates. So we lower that and we're providing the banks cheap funding directly from our balance sheet. So, the focus is really very much on doing other things to get funding costs down and to promote the supply of credit.

We've done all we can do on the cash rate, so we've got to look elsewhere now.


Thank you. Your next question comes from John Kehoe from the Australian Financial Review. Please go ahead.

John Kehoe, Australian Financial Review

Thanks Governor. Australia has traditionally been known, I think, in the last decade or two as a bit of a safe haven. At the moment, I think the market is testing that view. We're seeing heavy selling of the Australian dollar and government bonds. The AAA credit rating may come under pressure. I'm not sure if that matters in today's day and age, given so few countries actually hold it, but what would you say to investors out there and people around the world who seem to be testing the RBA's resolve in these financial markets at the moment?

Philip Lowe

I don't think people are testing Australia and really questioning our fundamentals. What's happening and we saw again this happened today, is there's widespread liquidation of financial positions right around the world. So we have a lot of people trying to close out positions and moving to cash. Some of those positions have historically been in Australian dollars and so people sell Australian dollars as they close out those positions and the currency falls and bond yields have gone up. My interpretation isn't it's something Australian-specific. There is something global going on here. Investors are very nervous about the future. They're unsure about how the health situation will develop, how quickly will we get on top of it, how is the medical system in many countries going to cope? In countries that have lockdowns, how long is that going to last? I think until we can answer those questions, we're going to live with a lot of uncertainty and a lot of volatility.

In Australia, as I've spoken about on other occasions, we have fantastic underlying fundamentals. We've got a strong resource base, resilient and adaptable people, a great education system, rule of law, fantastic public institutions. Those things are still going to be there at the end of the year, hopefully when the virus has been contained. I'd just encourage people to look through to those fundamentals and be prepared to look to the other side. As the central bank Governor, I've been incredibly impressed by the coordination between the government, the regulatory agencies and the Reserve Bank. I think it's showing Australians really as best …, not just as central bank Governor, but as an individual Australian and I've been remarkably impressed at how everyone has been pulling together. It's one of our strengths. We cooperate effectively and we're going to get through this and our fundamentals will still be there.

So that's what I'd say to those investors, look to the fundamentals. Don't panic, we will get through this and you want to be there on the other side when things are improving, because they will.


Thank you. Your next question comes from Su-Lin Ong from RBC Capital Markets. Please go ahead.

Su-Lin Ong, RBC Capital Markets

Governor, I'm just interested in whether there was any discussion to target a 10-year yield rather than three-years? That could possibly better anchor risk-free rates and expectations as well, flatter curve and maybe transmit through more fully to the broader economy.

Philip Lowe

Well, I've thought about that. We didn't discuss that at our board meeting. I think the 3-year rate makes sense because the 3-year rate is a benchmark rate for many bank bond raisings. It's also consistent with our view that the cash rate is likely to stay at its current level for some years. I don't think the cash rate is going to be at 0.25 per cent for 10 years, but I think it's quite likely that it could be at this current level for three years and the Board shares that view. Given that view about the expected outlook for the cash rate, we thought targeting a 3-year yield was consistent with our view on monetary policy and we wanted to see the government yield curve move down to that level. Picking a target level for a 10-year yield would be much more difficult because we wouldn't be confident that the interest rates were going to stay at a given level for 10 years, but I think it's quite reasonable to think that this cash rate could be at this level for quite a few years, which would be consistent with the 3-year horizon we've chosen.

It's also consistent with the 3-year funding package we have for the banking system. So there's a strong coherence with 3 years and 25 basis points. Thank you.


Thank you. Your next question comes from Michael Heath from Bloomberg News. Please go ahead.

Michael Heath, Bloomberg News

Hi Governor. You mentioned earlier the coordination with local agencies like APRA and other groups. I'm just wondering about the international coordination that's been going on behind the scenes. Have you been satisfied with the amount happening? Has it been less or more than 2008? Would you have liked to have seen more?

Philip Lowe

No, I wouldn't have liked to have seen more. I can tell you I'm on late night conference calls many nights, sometimes until 1:00 am, and so are my colleagues. There's a tremendous amount of discussion going on, particularly with the authorities in the US. A major issue there is the dysfunction in the US Treasuries market, which is ultimately the benchmark for many financial contracts around the world, so we're having extensive discussions about what's going on in that market and also whether there are other policy measures that we can take as a group. So I'm very happy with the coordination and information sharing that's taken place.


Thank you. Your next question comes from Patrick Commins of The Australian. Please go ahead.

Patrick Commins, The Australian

Thanks Governor. Given your understanding of the impact of the pandemic on the economy, I know that it's rapidly evolving, but you are expecting significant job losses and looking at what is happening in other areas, how are you judging the risk of a disorderly fall in house prices? And given what the rates are now and your view that you've done all that you can do on the cash rate, what could the RBA do to address this, if it were to occur?

Philip Lowe

Well that's not right at the moment high on our priority list. The priority is making sure that people can keep their jobs and small businesses can stay alive. I think it's quite likely over the next few months there will not be many transactions in the housing market. The uncertainty that most people in the community feel is likely to see them out of the housing market. So the housing prices will be what they'll be over the next few months and if I'm right that we see a recovery, then towards the end of the year people should feel confident again to go back into the housing market. But at the moment it's all about people keeping jobs and businesses keeping alive.


Thank you. Your next question comes from Carlos Cacho of UBS. Please go ahead.

Matt Johnson, UBS

Hello, Governor Lowe. It's actually Matt Johnson, we swapped log in details. Anyhow, congratulations today on a bold and creative policy package. I'd like to ask a question about the parameters of the bond buying program. On Monday people thought that you were going to do a broad-based across the curve bond buying program to support market function, and of course, I'm sure you saw that the curve has taken up to 200 basis points today on your announcement and partly that's because people think that you've now pivoted away from that and you're only going to buy the short end of the curve. Can you confirm that you will be buying all the way out to 30 years and that you will be buying inflation-linked securities, because actually, further down the curve and the linkage and damage has been markets more broken than at the short end of the curve.

The second point, if you have time to get to it, are there any limits on how much you can buy or are willing to buy either as a share of the market or as a share of the outstanding of any single line. I know that you didn't put a limit on it, which I think was very wise.

Philip Lowe

Let me take the second question first, there are no limits on how much we can buy or what we can buy. We'll do what's necessary to achieve our objectives here. There are no limits and this is one reason that I haven't wanted to announce a target volume. Really, we're focussed on the price. We want to achieve the yield target and we'll do whatever is necessary to achieve that target. That may involve purchasing large volumes of government securities or it may not. We'll do whatever is necessary there.

We are prepared to buy government bonds right across the maturity spectrum. While our focus is very much on the 3-year yield, we're prepared to buy 5 and 10-year government bonds, because there is close substitutability between the different maturities.

So we're prepared to buy right across the maturity spectrum. We're going to do our first purchases tomorrow. On days when we're purchasing government securities, we'll make an announcement at 11.15 about what we're going to buy and by how much and those offers will be due into the Reserve Bank by around 3:30 in the afternoon, and we're prepared to buy right across the maturity spectrum. Whatever is necessary to achieve the target.

Probably one other point, the bond buying program is mainly about the target for the 3-year yields but it's also about making sure the conditions in the market are stable and the liquidity conditions are reasonable. So if we see evidence that the market is becoming dysfunctional, the liquidity is drying up in particular areas, just as might have happened in the foreign exchange market, we're prepared to enter the market to try and add some liquidity and stabilise conditions and we have this price target for the 3-year yields. Thank you.


Thank you. Your next question comes from Carrington Clarke from the ABC. Please go ahead.

Carrington Clarke, ABC

Good afternoon, Governor Lowe. Can I first ask how vulnerable are Australian households, given that household debt to income ratio is one of the highest in the world? A second question, the government is obviously wanting to encourage banks to lend to small businesses through difficult times. How are you going to ensure that lending standards don't fall given the uncertainty about the future income flows for those businesses?

Philip Lowe

Well, the vulnerability for households comes if they lose their jobs, so this is why we have such a focus on doing what we can for businesses to keep employing people and keeping staff on. If someone with a high level of debt loses their job, then they're going to have difficulty. We're working with the banks to come up with arrangements so that the banks can help people through this period of temporary unemployment, because after all, this should only be a temporary episode. Things will get better. As people lose jobs over the next few months, I'm hoping by the end of the year or early next year they'll be finding them again. So we've got to create this bridge to when things are improving and the banks have a role to do that.

I heard the Treasurer say just before I came in, that it's in the banks' interest to support people through this period because if they don't support people the unemployment rate will be higher, there'll be more stress as you suggested and the economy will be weaker and the banks' credit losses will be larger. So, because this is a temporary shock, it will go away, we need to create this bridge to the better day and the banks have an important role to do that. And if the banks don't do that, I fear their ultimate losses will be larger, so it's in their interest, it's in their customers' interest, and the country's interest that they do do that, especially because we've got this higher level of household debt. Thank you.


Thank you. Your next question comes from James Glynn of The Wall Street Journal. Please go ahead.

James Glynn, The Wall Street Journal

Thanks, Phil. I was just wondering, does your desire to ensure properly functioning markets extend to the Aussie dollar? The RBA intervened during the GFC quite successfully, or are you happy at this moment to just allow the shock absorber to do its job?

Philip Lowe

The Australian dollar as I've said on other occasions, has been a great shock absorber for the Australian economy and I'm confident that it will continue to act in that way.

We are prepared to act in the market if liquidity conditions are such that the market is not two-sided and the exchange rate is just moving around for no fundamental reasons. We've seen very weak liquidity conditions so far but we haven't judged them sufficiently poor that we wanted to enter the market. You'll recall a week or so ago there was a flash crash when the currency fell 3 or 4 cents very quickly and then rebounded, and today it's come down a reasonable amount as well. Liquidity is thin, but it hasn't been to the point where we needed to intervene, but we are prepared to if liquidity conditions deteriorate.

It's very much the same approach we're bringing to the bond market. We want to see these markets operate normally. We want to see people to be able to buy and sell at the prices that the intermediaries are quoting, and if that's not the case, we're prepared to take actions in the country's interest for these markets to operate normally.


Thank you. Your next question comes from Shane Wright from The Age. Please go ahead.

Shane Wright, The Age

G'day Governor. Last year you talked about trying to get the unemployment rate down to 4.5 per cent. I'm just wondering when you talk about full employment is that the mark we're looking for and, in your mind, what does a strong recovery look like?

Philip Lowe

I still think 4½ per cent is a reasonable estimate of full employment in Australia. I don't think we're going to see that in the next little while. The unemployment rate is going to rise over the next coming months, I can't imagine many firms taking on workers except if they're in the health sector and some areas particularly affected by the virus. We're not going to see much job hiring and the reality is we'll see quite a few job losses. I think we have to steel ourselves for a rise in the unemployment rate. My hope is that it's a fairly temporary event. That as the virus is contained the economy recovers and all those people who lose jobs temporarily will find them again.

If we do a reasonable job of containing the virus that could happen quite quickly. Even in China with their extraordinary measures, it appears that they've contained the virus and many of their businesses are getting back to normal activity and that's just a couple of months after the virus first appeared. Whether we can achieve such a quick turnaround, I'm not sure, but certainly by the end of the year I would hope that anyone who is losing their job in the next little while will have that job back and we'll see strong growth in economic activity. But I do think it's going to be quite some time before we get to full employment and this is one reason why I think we're going to have lower interest rates for a long period of time.

Inflation might pick up temporarily because of the exchange rate depreciation but the increase in inflation will only be temporary unless wage growth and other costs in the economy start growing more quickly than they've been. I think we're in a world of low inflation for quite some time and that means lower interest rates for quite some time.