Transcript of Question & Answer Session The Recovery from a Very Uneven Recession


For the virtual audience, if you can go on to Slido and put some questions in there. Governor, I'll start with a question myself and then we'll go to the room and then we'll see what comes through on the Slido, okay. It's been a week since the Treasurer released the federal budget. In your opinion, was the magnitude and timing of the announced spending measures meaningful for removing the concern that some people would say would be termed as a fiscal cliff?

Philip Lowe

Well, I don't want to comment on the specifics of the budget, but I think the strategy is right. As the Treasurer and the Prime Minister have identified, creating jobs is a priority. You look at the entirety of the budget and I think it's going to do that. The continuing income support to people will help. As people have this income, they will spend it and that will help to create jobs. There are initiatives to create jobs directly through public spending on infrastructure and public health. There are also incentives for businesses to expand and invest and hire people; that will help. And there are some structural reforms in the budget which hopefully give business confidence that the economy will grow.

I think you put all that together, there's enough there to give me confidence that this will be enough to get the recovery going and continue. I would like to see the states play a role in the fiscal response as well. For those of you who have been reading the media and have seen the National Cabinet Meeting, I suggested to the states that it would be good if they increase their spending by an additional 2 per cent of GDP. There's been some progress on that front, I'd like to see further progress but the fiscal response, broadly speaking, has been what the country needed.


Thank you. All right, we'll take from the audience? A microphone please.

Rory Robertson, Westpac Group Treasury

Governor Lowe, thank you for your important update today. Former Treasurer and Prime Minister, Paul Keating, was recently highly critical of the Bank for supposedly not doing enough. You've shown a chart of the Bank's balance sheet that shows the Reserve Bank has done plenty. The question is, has it done enough? You've said today, just a moment ago, that ‘larger increases in balance sheets have occurred in other countries, we are considering the implications of this as we work through our own options.’ In July, you mentioned that the Reserve Bank was open to the idea of possibly doing a QE program where longer term government debt might be bought, over and above what's needed to satisfy the 3-year yield target.

My question is about how would you design such a QE program? I imagine that the federal government's budget and the state budgets in the past month or so have given you a sense that there's something like more than half a trillion dollars of extra government debt going to be in the market in the next few years. How would the Bank go about designing a program? Is it a matter of calibrating it to the size of government debt? What would a sensible QE program look like in terms of regular purchase of government debt? Simply, how would you go about designing such a thing?

Philip Lowe

Well, I'm not going to speculate on that because we haven't yet decided to go down this route. Obviously, we've had internal discussions how we do this and I'm confident that if we take the decision to do this, then we can do it and we do it sensibly. We've studied the experience of other countries. We know what works and we know what doesn't work so well. One of the factors that we've been focusing on is that while our 3-year government interest rates are pretty much the same as everywhere else around the world, our 10-year yields are higher than almost every other western country. So 10-year yields, I think this morning, are kind of 80, maybe 85 and in many other countries they're 60, 50, and obviously in Europe or Japan they're either zero or negative.

But our 10-year yields are higher than almost everywhere in the world. The Reserve Bank has not bought bonds in the 5–10 year range except for in early March. We're trying to understand whether those two things are related. The fact that we've got higher 10-year bond yields than the rest of the world, is that related to the fact that we're not buying bonds at that maturity and if that's the reason, is there benefit in having those interest rates come down as we try and support jobs. That's the issue we're grappling with. I think the design of a program, if we decide to do this, is relatively straightforward. The bigger question is what benefit do we get from it.

Rory Robertson

Thank you very much.


One more from the audience.

Jonathan Shapiro, The Australian Financial Review

As is often the case, you've just answered my question before I got to ask it, which was if you could expand on considering the implications when you mentioned interest rate differentials in a world of balance sheet expansion. So perhaps you could expand a little bit more on that and what you're considering and if we should read into that that you are moving a step closer towards increasing bond purchases along the curve with the view to perhaps easing upward pressure on the exchange rate. And also, if you could discuss whether you're weighing off expansion of the balance sheet via the TFF versus buying more bonds higher up the curve and if you've weighed off the relative efficacy in achieving your monetary policy objectives. Thanks.

Philip Lowe

Thank you. Well we expanded the TFF in September. Banks can now borrow the equivalent of 5 per cent of their total lending under that facility and some banks can borrow even more if they've expanded their business credit. At least at the moment I don't see very much room to do further on that front. So the question that's before us is, is there benefit in us buying bonds further out along the yield curve, let's say the 5-10 year range, what effect would that have on the longer term interest rates, what effect would it have on the exchange rate and an equally important question is if there were effects on the longer term interest rate and the exchange rate, what benefit would you get from that in terms of jobs, because jobs is our main focus at the moment. So the question the Board is working through, and it's a difficult question, if we buy government bonds in the 5-10 year range, is that going to create more jobs and how would it create more jobs.

This is why we're taking our time to work through that issue. It's a very important issue, but it's also quite complex. So we're talking our time but that's what we're discussing at every one of our meetings. I think on the TFF, we've done what we reasonably can there.


Okay, it looks like we've got 43 seconds. There's been a bit on inflation coming through on Slido. Just quickly, Governor, given Japan and the past 12 years, there's been no guarantee that inflation can be increased at the desired levels, what is being considered should this be a reality?

Philip Lowe

Well, I think I've just talked about the things that are under consideration. Us buying bonds further out along the yield curve and it's also possible to reduce the interest rates that are currently at 25 basis points down to 10. So these are adjustments that we're currently working through and asking what effect it would have. But realistically, they're not going to be the things that drive inflation quickly back to 2.5 per cent. So a longer term question we're also considering is how does the inflation targeting framework sit in this world that we're currently living in. We've had some difficulty over recent years of average inflation at 2 per cent and the pandemic is going to make that much more difficult. So what role does that have, and that role has to evolve over time.

But what doesn't really evolve are the core objectives of the Reserve Bank and they're set out in legislation that was very wisely written back in 1959. That's price stability, full employment and the economic welfare of the people of Australia. So they're some constants and those constants are going to continue to drive us. But as it becomes more difficult to control inflation and the range, we will have to evolve how we operate monetary policy and the evolution and now thinking about forward guidance that I talked about today as part of that broader evolution, but I expect over time you'll see more. But you won't see us change the very broad focus on price stability, full employment and the welfare of the people; that's ultimately what's important.