Transcript of Question & Answer Session An Economic and Financial Update


We will now go to questions. Please limit yourself to one question each. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you are on a speaker phone, please pick up the handset to ask your question.

Your first question comes from Vesna Poljak with the Australian Financial Review. Please go ahead.

Vesna Poljak, The Australian Financial Review

Thank you. What's the Governor's position on whether superfunds with liquidity issues should be able to participate in the repo facility, should they ask for it?

Philip Lowe

Thank you, Vesna. The liquidity withdrawal from the superfund industry as a whole is perfectly manageable. For some funds, withdrawals are going to be quite large though and those funds will have to shrink. Some of the scenarios suggest that up to 20 or 25 per cent of funds under management could be withdrawn for some particular funds. But these funds have now had a month to get ready and they have further time before those withdrawals will take place. So I'm confident that they will be able to meet the liquidity demands from their members. If the Reserve Bank was to provide a liquidity support facility, it would need to pass the public interest test and we'd need to be able to conclude that it was needed to support the stability of the financial system. And at the moment we're not in a position to conclude that.


Thank you. Your next question comes from Peter Ryan with the ABC. Please go ahead.

Peter Ryan, ABC

Yes, thank you very much for taking my question. I was wondering, given everything that you just outlined there, whether you're starting to see in these strains in confidence in the financial system, in terms of what we saw back in the GFC when institutions were getting a bit scared to lend to each other.

Philip Lowe

Not at all, Peter. I mean, the banks have a lot of liquidity at the moment. During the financial crisis, there were liquidity concerns at certain points in time. The combination of our bond buying program and the term funding facility and our increased repos have given banks the confidence that they will have access to the liquidity that's needed. Credit spreads rose a couple of weeks ago, but they are now in the process of normalising and we've seen some issuers return to both the domestic and the foreign market. So at the moment, we're not seeing signs of any stress at all in our financial system and I've been incredibly impressed by the commitment of the banks to support their customers through this difficult period.

As I said in my prepared remarks, the banks are acting as shock absorbers for the economy. In the Global Financial Crisis, not in Australia, but elsewhere, the banks were acting as amplifiers. Here, they're acting as shock absorbers, which is to our collective benefit.


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

Patrick Commins, The Australian

Well, thanks very much Governor. My question is with the RBA's scenario analysis, assumes that the damage to the economy from the restrictions do they compound it and it's at a nonlinear rate, the longer they're in place? Does the damage compound, the longer they're in place?

Philip Lowe

It's possible that that's the case although I haven't really thought about that scenario in a great deal of detail. But the longer this goes on than the loss of incomes and the loss of jobs is more pronounced, that's obvious, and the damage to the business sector is more pronounced. The experience from other recessions is that the more people lose jobs and the more businesses are destroyed, the longer it takes to recover. So how these things compound in practise it's hard to tell, but it's clear that the longer this goes on, the greater the damage to the economic infrastructure of the country will be.


Thank you. Your next question comes from Jonathan Shapiro with the Australian Financial Review. Please go ahead. Jonathan, your line is live.

Jonathan Shapiro, The Australian Financial Review

Thank you, Governor. My question relates to bond markets. What is your level of comfort with regard to long term bond rates which may be low historically that are high relative to short term rates and other major bond markets? And is there a risk that the size of government funding tasks creates future dislocations in fixed income markets? Thank you.

Philip Lowe

As you say long term bond rates are very low. They're very low in terms of our history. I think right at the moment, the 10-year yield, is it 0.83 per cent. So the Australian government can borrow for 10 years at less than 1%, and it can borrow for three years at one quarter of 1%. So the borrowing costs are incredibly low. They're as low as they've ever been. I don't have particular concerns that the government's borrowing task will cause dislocation in these markets. Again, last week the government raised I think $13 billion. This week it's raising another five or six or $7 billion. So over two weeks it's raised $20 billion. And I expect that we'll return to the markets each of the following weeks with substantial bond raisings as well. At the moment I don't have any concerns that that's going to cause dislocation in the market.

The liaison that we're doing both with the domestic investors and overseas investors, is that there's strong demand for Australian government securities, as there should be. We have a very high credit rating. We have one of the lowest stocks of public debt on issue, we're managing the health crisis much better than many other economies and we will get through this in a strong position. So I don't have any concerns that people won't want to buy Australian government bonds.


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

Stephen Halmarick, Commonwealth Bank

Yes, thank you and thank you Phil for taking the questions. So you talked about reinvigorating growth and productivity. I'm just wondering what do you think is on the list, or what should be the priority for the governments to reinvigorate productivity? And a quick second question if I can, what did you, what's your assumptions on the participation rate for the labour market and the impact of that on the unemployment rate? Thank you.

Philip Lowe

On the first question, I think there are overall challenge is to make Australia a great place where businesses want to expand, innovate, invest and hire people. And if we can do that, then we'll drive higher living standards for all Australians. How do we do that? How do we make Australia a great place to invest, expand, innovate, and hire people? Well, I think we start off by reading the multitude of reports that have already been commissioned on this issue and perhaps I could run through, for you at a very high level what those reports say. They say we should be looking again at the way we tax income generation consumption and land in this country. They say we should be looking at how we build and price infrastructure. They say we should be looking at how we train our students and our workforce, so they've got the skills for the modern economy.

They say we should be looking at how various regulations promote or perhaps hinder innovation and they say we should be looking at the flexibility and complexity of our industrial relations system. So they're the broad areas. I don't want to advocate particular policies at the moment within each of those areas, but there's plenty of advice out there from various other bodies and in these reports that have been commissioned. And I'm hopeful that the spirit of cooperative behaviour that we're now seeing will actually translate into being able to address some of these issues. You asked about the assumption on the participation rate, and here again, we're working with various scenarios because it's very hard to know whether people who've been stood down are going to be actively looking for jobs or they're just going to wait until their business recovers.

So at the moment, our main focus on the labour market is on total hours worked. I think we have a better handle on how total hours worked are going to evolve. And as I said, they're expected to be down 20% in the June quarter, which is a staggering number. And how that then plays out in terms of unemployment and participation and people not being in the labour force. So I think it's very hard to tell. It really depends upon the success that firms have in keeping their employees attached to them while they're stood down. But I think for the next little while, our main focus will be on total hours worked in the economy. That'll be the best guide to kind of help with how quickly we're recovering when we see hours worked, start picking up again.


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

Shane Wright, The Age

Good afternoon, Governor. I'm just wondering a couple of years ago the banking regulators and yourselves came to a position around investors and moving them away from say investor interest only loans and towards a principal and interest. Is it now time to reconsider some of those policies given the real strain that's being placed across the property market on investors who may have lost and on their tenants who may not be able to pay their rent?

Philip Lowe

Well, both the restrictions on investors and an interest only loans were both removed last year or it's even further back than that. So those restrictions are no longer in place, so it's hard to argue that they're a factor in the current dynamics in the housing market. I think the property market is likely to go through a difficult period over the coming months, but it's not because of these restrictions and there's no capacity to remove these restrictions to boost the market.


Thank you. Your next question comes from Rory Robertson with the Westpac Group Treasury. Please go ahead.

Rory Robertson, Westpac Group Treasury

Good afternoon, Governor Lowe. Thanks for your thoughtful update on this extraordinary episode. Today's reported 6 per cent fall in employment over the past month is literally off the charts. So on the bright side the past month has also brought dramatic declines in new Covid-19 cases and hospitalisations to impressively low levels. Despite thousands of resolved Covid-19 cases and serious comparisons with the Spanish flu so far in Australia, only three people under 60 years of age have died. So my question is given recent excellent news on the health front and with the National Cabinet flagging a start to a modest gradual, bit by bit easing of restrictions after the Anzac Day weekend, are you increasingly hopeful that a significant economic recovery can begin in coming months? Thank you.

Philip Lowe

Well I listened to the Prime Minister's press conference before coming down here this afternoon and he did say that we're now on the road back and we've reached a turning point. He followed that up by saying that the current restrictions need to stay in place for some time because we don't want to have a major setback here. There's been an unbelievably huge effort by Australians to get us to this very good position we're in now and I'm hopeful that if we can continue that effort then the restrictions will be able to be eased in time and that within three or four months we'll start the recovery. But for us to recover, we do need to keep the virus under control and we have to rely on the health experts there.

But the next, as I said in my remarks, the next few months are going to be very difficult and today's data from the ABS saying that there was a 6 per cent decline in the number of jobs in the country in the past three weeks just reminds us just how significant the contraction is. So I hope the effort that we've all put in to reduce the incidents of the virus continues and that we can start recovering in a few months' time.


Thank you. Your next question comes from Phillip Lasker with the ABC. Please go ahead.

Phillip Lasker, ABC

Governor, you said just a moment ago that the more businesses that are destroyed, the longer it takes for the recovery for the economic recovery. Is it wise under those circumstances then to rule out any type of assistance to prevent companies from collapsing? Is it wise, for example, for governments to rule out providing low interest loans to companies or investing or providing equity to those companies, particularly if those companies are in strategically important sectors or in labour intensive sectors? After all, we're going to see structural damage to the jobs market as well as a result of this. And also are you reluctant to use the word recession?

Philip Lowe

I'm not reluctant to use it, but I think this is better described as an economic contraction. Now you can use the word recession if you want, but I'm thinking this is a kind of a very marked economic contraction. It's very different to the business cycle downturns that we've seen over the past 50 or 60 years. It's a once in a century event of marked economic contraction from which we will recover from. And for me it's, the label isn't particularly important, but it is a once in a century economic contraction.

You asked about the government providing assistance and is that appropriate? The government has already provided huge amounts of assistance to businesses to keep them afloat. In the first couple of policy packages, there were large payments to small businesses, cash payments to keep them afloat. The government has delayed or deferred many charges on businesses as well. And the wage subsidy program is really helping many businesses keep afloat and to keep the workers connected to the business, which is incredibly important as well. So the government has done an extraordinary amount so far. We can always debate whether it should take further steps, but I think it's appropriate at the moment to pause and to examine the evidence on the success of the program so far.


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

John Kehoe, Australian Financial Review

Governor, thank you for the speech and making yourself available for questions. You mentioned that headline inflation could very well turn negative this year there are some creditable economists out there who are worried about deflation more over the medium term, pointing to some sort of negative spiral between wages and inflation and the hours worked, some of those trends you're talking to. Doesn't that mean that invariably or inevitably we're going to need pretty serious ongoing fiscal and monetary support for quite a while, even beyond the initial emergency, just to counteract the threat or risk of deflation, which could be very damaging over the medium term?

Philip Lowe

Well, I don't think we're going to have deflation over the medium term. In next quarter we've got some very specific and unusual events which are going to drive the inflation rate low into negative territory probably. And that's the big decline in oil prices and the introduction of free childcare immediately. So they're events that are unlikely to be repeated. I think at some point oil prices will probably rise again and the government won't keep on cutting childcare prices. So I think inflation will after a period, normalise. But I also think that we're going to have to have low interest rates for a very long period of time. As I've said on previous occasions, we will not be increasing the cash rate until we're confident that inflation is going to be between 2 and 3 per cent on a sustainable basis. When we release our forecast in a couple of weeks, you'll see that inflation over the horizon is not going to be between 2 and 3 per cent over the next two or three years.

I think it's quite likely that we have the current setting of interest rate for a number of years and this is reinforced by our target on three-year yields of 25 basis points. It's quite likely that we'll be at this level of interest rate for years and low level of interest rates and fiscal support I think will be enough to get the economy growing at a reasonable pace and over time, wage growth to gradually pick up. Wage growth previously was not fast enough to deliver 2.5 per cent inflation. And as I said in my prepared remarks, wage growth is going to slow and I think it'll be a couple of years before it's back to the current rate. So we're going to have low inflation and low interest rates for quite a long period of time. That's the world we currently live in.


Thank you. Your next question comes from Michael Pascoe with the New Daily. Please go ahead.

Michael Pascoe, The New Daily

Thank you, Governor. The gap between the emergency funding now in place, a six month time limit on it from the government and the eventual impact of the worthy productivity initiatives you mentioned, there is a big gap between those two events. The bridge would seem to be considerably longer than six months. Do you envisage further funding will be needed in order to prevent the real unemployment rate going significantly above 6 per cent?

Philip Lowe

Well, it really depends upon how long the restrictions remained in place. But I was encouraged by the press conference of the Prime Minister and the Chief Medical Officer and the Health Minister. They were saying that now they think we're on the road back and if we stay on that road, then these restrictions will be progressively lifted. And as that happens, economic activity will return towards normal. I think we all hope that that takes place as quickly as possible.

Michael Pascoe

Hoping could mean we're caught short when it doesn't.

Philip Lowe

There are various scenarios here and in our Statement on Monetary Policy to be released in a few weeks' time, we'll outline some of those scenarios. None of us have a crystal ball here, so it is possible that the virus reappears and we can't loosen off the restrictions. In that scenario, the loss of jobs and incomes is even more staggering than I outlined in the central scenarios. But we shouldn't catastrophise here. The current signs are positive on the health front and if they can continue then they'll turn positive on the economic front as well.


Thank you. Your next question comes from Prashant Newnaha with TD securities. Please go ahead.

Prashant Newnaha, TD Securities

Good afternoon, Governor. A question on the bond buying conducted by the RBA so far. Why has the RBA not purchased a duration beyond the 10-year segment of the curve. The banks or even the segment of that curve is functioning smoothly or are there other issues at play?

Philip Lowe

We've had two main focuses. One is to get the three yield at 25 basis points. To do that we've bought a lot of securities at the short end as you would expect and the second objective was to improve market functioning and the area of the curve that we'd focused most on was between three and 10 years. And as we've purchased those securities, the market is working more effectively and we also hear from our liaison that as we've improved the functioning of that part of the market, the market has also improved for the longer term securities, the ones between 10 and 30 years. So we're hopeful that this is a gradual process of normalisation taking place and it's starting at the securities less than 10 years has facilitated that process. We don't have any in principle objection to buying the longer securities, but we've focused our purchases where we thought they'd be most effective and that was around the three year mark and out to 10 years.


Thank you. Your next question comes from Matthew Cranston with the Financial Review. Please go ahead.

Matthew Cranston, Australian Financial Review

Dr Lowe, I'm just wondering if you can give some views on the traditional transmission channels of your monetary policy and how that's going to work. I notice you've said that $3 billion out of the $90 billion in that facility has gone through to 35 institutions, but how deeply does that go into the economy? How many people will take up cheap loans and how valuable and how worthwhile are cheaper loans. Do they get through in all those traditional mechanisms?

Philip Lowe

Well, I said that 35 institutions have so far drawn funding under the term funding facilities, but I'm expecting that over the coming months that every single financial institution will draw funding under that scheme. Initially not everyone has because they haven't got their liquidity plans to the state where they're in a position to draw on the funding. But I'm confident that they will and we've spoken to most of Australia's financial institutions and they say they're going to draw under the scheme. And I'm confident that with institutions being able to raise funds at 25 basis points that will in time be passed through to lower cost of funding for their mortgage customers and their business customers. We saw that immediately after we made the announcement of this policy package, a number of the banks cut their interest rates by a hundred basis points to small and medium size businesses.

So there was an immediate transmission and partly that was on the back of our announcement. So I think it's working. The other way that it's working is giving institutions the confidence that they will have access to liquidity in difficult financial times. Institutions might worry that they can't get funding and therefore they don't want to lend. We've taken that risk off the table for Australian financial institutions. They will have access to funding. We'll make sure of that, and the cost of that funding will be low. Through the process of competition, I think that eventually leads to lower funding costs and credit being available to businesses and households.

The other point that I would make here is that I've been incredibly impressed by the commitment of the banks to do the right thing by their customers. Now they understand that they're part of team Australia, that they have a role to play in keeping the economy running. So that commitment to being on team Australia plus the competitive dynamics that come from having guaranteed access to funding at lower interest rates. We'll see lower funding costs and more credit available to both businesses and households, which in time will help. The lower exchange rate also has an effect on the currency, which in time again, will help.


Thank you. Your next question comes from Will Koulouris with CNBC. Please go ahead.

Will Koulouris, CNBC

Thanks Governor. I was just wondering, in terms of, you know, you mentioned the banks being the shock absorbers for the economy, they're the main transmission in terms of a lot of the funding support. Would it be your preference for them to forego paying dividends much like we're seeing in New Zealand until we see some kind of clarity as to the economic impact moving forward?

Philip Lowe

Well they're certainly going to cut back dividends, which I think is entirely appropriate. APRA made an announcement on this issue last week or the week before last, I think that was appropriate that financial institutions cut back dividends. You've got to remember though Australia's banks have very high levels of capital. We've undertaken extensive stress testing in all of those stress tests they've maintained well capitalised. So they have the ability to pay dividends and some Australians rely on those dividends for their income. So there's a balance to be struck and by cutting back dividends from where they were of the past couple of years, I think we're moving in the right direction to strike that right balance, but I don't think they need to be banned.


Thank you. Your next question comes from Sarah Turner with the AFR. Please go ahead.

Sarah Turner, Australian Financial Review

Oh, hello. Thanks for taking my question. I'm just wondering how you see the Australian dollar's role as a shock absorber this time round. Do you think it's going to be as effective as it has been in the past, given that the forecasts of global demand are pretty weak at the moment?

Philip Lowe

Well, as you say that exchange rate has been a shock absorber in the past. My view looking at the economic history for the past 30 years is the exchange rate has been the great shock absorber. It stabilised the economy more than anything else, perhaps even more than our own monetary policy. Exchange rate at the moment is working as it normally would. Earlier in the year it was in the high sixties, it came down more than we expected a month ago as investors were engaged in blind selling of assets to generate cash. But as that period of panic has passed, the exchange rates come up a bit, but is still down very significantly on the year, and that's helping stabilise the economy.

At the moment, there may be not very much imports and exports taking place, but once the restrictions start lifting, the lower currency that we have will help our exporters and domestic industries. So it's working as normal. But a few weeks ago there was a very large depreciation as people panicked, but that panic has now passed.