Transcript of Question & Answer Session Today's Monetary Policy Decision


Thank you, we will now go to questions. Please limit yourself to one question each. If you wish to ask a question, please press star *1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press *2. If you are on a speakerphone, please pick up the handset to ask your question. Your first question comes from Matt Cranston from The Australian Financial Review. Please go ahead.

Matt Cranston, The Australian Financial Review

Governor, thanks for taking questions. A few very quick ones. If Victoria hadn't gone into lockdown, do you think you'd need to take these measures? And secondly, your expectations for the banks, I know obviously you'd like them to just pass on cheaper funding, but could you be a little bit more precise in what you expect the banks to do following this unprecedented reduction in funding costs?

Philip Lowe

On the question of Victoria, it's clear that the lockdown in Victoria has detracted from GDP growth. Our estimate is that it's taken off between 1.5% and 2% off GDP. So that's in the current quarter, but our decision to implement this policy package today is really about the outlook for unemployment over the next two years. Developments in Victoria haven't helped that, but I think we still would have been making this adjustment in policy, even if we hadn't had the lockdown in Victoria, because the outlook for the labour market, I think requires further action. We can do better than having the unemployment rate sit in the sixes and sevens for a few years. And if we can do better than that, the Reserve Bank Board's view is that we should try to get there.

The second question was about pass through. I would expect and hope that these interest rate reductions get passed through to all borrowers. We've got to recognise though that the way that pass through is occurring in the Australian financial system has changed over time. It used to be banks lowering the standard variable rate and all rates would adjust immediately. But what's happened over the course of the past year is that many banks have left their standard variable rates unchanged. In the past it was occurring through borrowers renegotiating with their bank at a lower rate, or in some cases, switching to a bank who's prepared to offer them a lower rate.

So that seems to be the way that pass through is working. I would expect that to continue to be the case. I think the best outcome would be for standard variable rates to be lowered. But if that doesn't occur, I'm confident that there'll be pass through occurring through people renegotiating and switching. And as I have been doing for years, I encourage everybody to go and ask their bank for a better deal and If they don't give you a better deal after today's decision. Ask them, and if they don't give it to you, switch to a bank that will.


Thank you, your next question comes from Josh Williamson from Citigroup. Please go ahead.

Josh Williamson, Citigroup

Well hello Dr Lowe, this is actually Josh Williamson here at Citigroup. My question for you is very brief. You'd previously stated that the effective lower bound on policy rate was 25 basis points. Does the shift today to 10 basis points imply that it is the new effective lower bound or have you got a lower bound in mind?

Philip Lowe

I think 10 basis points is pretty low. There's not much room between zero and 10, is there? I think it's appropriate to keep a margin between kind of the cash rate target and the rate we pay on exchange settlement balances. So as I said in my prepared remarks, I think we are at the effective lower bound now. We have very little appetite, essentially no appetite to go into negative territory. Judgement is that that would not be helpful. I don't think kind of moving the cash rate target from eight to seven basis points makes any sense either. So I think we've done as much as we can on interest rates and the focus now is really on the quantity of asset purchases.


Thank you, your next question is from Ricardo Goncalves from SBS. Please go ahead.

Ricardo Goncalves, SBS

G'day Governor, was the package of measures unanimously supported by all Board members?

Philip Lowe

I don't think it's appropriate to talk about the views of individual board members, but the short answer is there's a very broad consensus that this is the right way to go. I think we're all concerned about the outlook for the jobs and the labour market. And we recognise that this package of measures will, in the end, help support spending in the economy and it will create more jobs and more people have better lives because of that, and we're united in that conviction.


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

Swati Pandey, Reuters

Hello Governor, my question is about your 5 to 10-year bond purchase, is there a level you would like 10-year yields to fall to? And is there a feeling for that amount of bonds you are willing to buy?

Philip Lowe

I didn't catch the first part of the question. Is that, is there a level of the yield that we …?

Swati Pandey

Yeah, is there a level you would like 10-year yields to fall to? How far you would like it to come down to …

Philip Lowe

We are not targeting the 5 or the 10-year yield. I don't think it's appropriate to do that in Australia. So we haven't got a target for that. I note that just before the press conference, the 10-year yield was down in the mid-70s, that's now 7 or 8 basis points below where the US is. It's a bit higher than 10-year yields in Canada. It would be helpful if they came down a little further, whether that happens or not will be determined by the mar ket and the market's response to our purchases but we don't have a target there.

In terms of our bond purchases as a share of the stock of debt outstanding when we complete the hundred billion we'll own around 15% of government bonds on issue. That sounds like a large number. In the US though the Federal Reserve owns a bit more than 20% of the US bonds on issue. I think in Europe, the ECB owns around 30%. I think in New Zealand, the Reserve Bank of New Zealand, owns nearly 40% of the government bonds on issue. If we need to do more, we have the scope to do that, and we'll continue to evaluate the case for that over the next year.


Thank you, your next question comes from Steven Halmarick from CBA. Please go ahead.

Steven Halmarick, CBA

Hello Governor, thanks for taking questions. I'm wondering what set of criteria would you use to decide if the increased bond purchase program ends after six months or it should continue after that?

Philip Lowe

It's a bit early, we haven't even started buying the bonds yet, so what happens at the end of the program, but at a higher level, I think there are two factors we'll be considering. The first is the impact of our purchase on market functioning. It's important that these markets continue to function well, we want to see a high level of liquidity in them, and we want to see the pricing process continue to work effectively.

The markets have to keep on working well, which I expect they will. The more fundamental consideration now is the outlook for jobs and employment and ultimately inflation. We will continue to look at our projections for the unemployment rate, whether people are getting back into jobs and what other policy efforts there are to support employment. At each of our meetings over the next six months, we'll be looking at whether there's a case to extend this, but we have to see how these bond purchases go in the market first of all.


Thank you, your next question comes from Ben Butler from The Guardian. Please go ahead.

Ben Butler, The Guardian

Thank you very much Governor. I thought I'd try my luck with two brief ones as well. Firstly, this is this wildly saying out there this afternoon as the Reserve Bank saying essentially that the government has not done enough or is not doing enough in terms of fiscal stimulus. I was wondering if you could respond to that in a way that's a little bit more expansive than no, that's not what we're saying. And secondly, I was wondering if you could provide for the lay person an explanation of why it is that the Reserve Bank won't run out of fire power.

Philip Lowe

On the first question, this is certainly not a judgement on the government's fiscal policy. I think the government's strategy is the right one through the combination of income transfers, incentives for the private sector and direct job creation, that together is going to help people get into jobs. And what we're doing is supporting and supplementing the government's efforts. So it would be completely incorrect to draw the conclusion that this is a judgement on the government's fiscal strategy. I think the government is on the right track and we want to be supportive of their efforts to get the unemployment rate down.

The second question was explain why there isn't a limit to what we can do. As I said before, other central banks have bought a lot more government securities than the Reserve Bank is currently planning to do, so we know from their experience that central banks through the process of money creation can buy government securities and the only limits on that, are the proper functioning of these markets.

There's an economic question to answer as well. Is it effective in stimulating economic activity? But because of the nature of a central bank, we can buy assets. If we decide we want to do that, we can effectively create money by crediting the banking systems accounts that they have with us and we can effectively do that without limit. There's ultimately a limit because of the credibility the process could come under question. We know the limit is much further north than where we currently are or are planning to be.


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

Shane Wright, The Age

Dr Lowe, before the virus, the Bank had low inflation, above NAIRU unemployment, and a relatively high underemployment. Now, even with these forecasts you've announced today, you've got inflation well short of the target out to 2022 and unemployment at 6% at the end of 2022. It just seems inevitable you're going to have to go further and keep rates lower for longer. Your idea that you hope to see interest rates going up sometime in the next five years seems a little forlorn. Is that fair?

Philip Lowe

I don't think it's forlorn. I'm more optimistic than you are. I would hope that we're not permanently in this world of zero interest rates. We're here largely because at the moment the appetite to save globally is very high, understandably, and the desire to invest is very low. Understandingly because of all the uncertainty. So when a lot of people want to save and not many people want to invest, savers through the interest rate, get low returns.

I don't think this is a permanent state of affairs. Sometime in the next five years, it's hard to predict exactly when, but sometime in the next five years, I'd expect people being prepared to spend more and save a bit less. And I do think the desire to invest by businesses will return. We can't predict exactly when and how fast it returns, but as that saving investment recalibrates then interest rates will rise.

It's hard to know exactly when, but I think we've got to be sufficiently optimistic that this recalibration will occur sometime over the next five years. Australia still has incredibly strong fundamentals. The medium-term investment outlook is positive. We have tremendous opportunities across a whole range of industries. Population growth has slowed now, but I think it will pick up again and there are a lot of productivity improvements that are coming out of the pandemic.

We're changing the way that we work and businesses operate. There's the whole digital revolution, which I think will present new investment opportunity. So I'm confident that sometime in the next five years, these fundamentals will reassert themselves. Businesses will want to invest again and people won't want to save at the rate they've been saving at recently and as they do that, the economy will strengthen and interest rates will normalise. I don't think that's a forlorn hope at all. I think it's quite realistic.


Thank you. Your next question is from Prashant Newnaha, from TD Securities. Please go ahead.

Prashant Newnaha, TD Securities

Hi, good afternoon, Governor. Just a question on the Bank's intended purchases of government securities. In the notes that were attached, you stated that the focus will be on bonds with a residual maturity of around five to 10 years, but they may include bonds outside of this range. So the question essentially is where is the 10-year cut off? Is it to the date, the year, or is it the 10-year bond basket?

Philip Lowe

Our intention is for it to be the 10-year bond basket and the same, for the five years. It'll move as the months move. But at the moment, I think there are probably bonds at kind of a bit less than five years and other bonds with a maturity of a bit more than 10 years that would be in those baskets and they'll move as the months pass. So we're not applying a strict cut off of exactly 10 years to the day. It's really the bond baskets. As I said, in my prepared remarks, we haven't ruled out buying bonds outside this range either if market conditions warrant it, we're expecting to be able to confine the bond purchases to those that are within the roughly five to 10-year range, but if we need to buy other bonds, we will. And of course, if we need to buy bonds to defend the three-year yield target, we will do that as well and that will be completely separate from the QE program.


Thank you. Next question is from Patrick Commins from The Australian. Please go ahead.

Patrick Commins, The Australian

Hi Dr Lowe. I have a question around savers. What do you say to savers and particularly retirees who are relying on income from their deposits to fund their retirement? They're essentially collateral damage of aggressive monetary policy, are they not?

Philip Lowe

Well, what I'd say to them is we understand their pain. We discussed this extensively at our Board meeting today. I know personally, because many of the people write to me explaining the difficult circumstances that they're in and I acknowledge the effect of monetary easing falls very unevenly across the community. The people who are relying on interest income as their main source of income bear a heavy share of the burden here. And I understand why they would be unhappy, and I think it's regrettable we find ourselves in this situation. As I said before, the underlying driver of this is there a lot of people around the world and want to save and not many people want to invest. So if you save a lot, but people don't want to use your money to invest, the harsh and unfortunate reality here is you're going to get a low return on your savings.

So the solution here is to get businesses to invest and to have other individuals want to use their income to spend, rather than to save. If we can do that, then as I said before, I'm confident we can get back to a world where savers can get decent rates of return. I think the other thing I would say to savers is there's an issue about the collective good here. I think lower interest rates will help support spending and ultimately that will create jobs. So the broader community will benefit from today's decision, but the effects are felt unevenly across the community. The solution to that is stronger growth, more investment and confidence so people save less and spend more and I would like to see that just as much as the savers.


Thank you. Your next question is from Jonathan Shapiro, from the AFR. Please go ahead.

Johnathon Shapiro, The Australian Financial Review

Thanks very much, Governor. The Reserve Bank has been reluctant or hesitant to go down the path of quantitative easing all the way up until around August, September. My question is what worries you now that you are entering this new monetary policy paradigm? What are your concerns in this new phase of monetary policy?

Philip Lowe

I don't have particular concerns about the new phase of monetary policy, our major priority is to do what we can to get people back into jobs. I'm concerned that we could go a few years with many tens, perhaps hundreds of thousands of people not having the employment that they should have. And we know that that's destructive for the economy, but it's also very damaging in people's lives and their prospects. So that's my major concern. I hope and I expect that today's efforts, will help there.

In terms of the specifics about our monetary policy decision, I worry about the effect on savers, as I just said. In the past, I would have worried about the effect on the housing market. I'm not particularly concerned about that at the moment. In the past, we've been worried that lower interest rates would encourage people to borrow more and push up housing prices. We're going to have to watch that carefully. But I think the dynamics of the housing market have changed. Population growth is slower. Investors are seeing rents fall at the fastest rate we've ever seen, the vacancy rate's quite high. So at the moment, not particularly worried about causing excesses in the housing market, we'll have to keep that under review. My main worry is, not enough people having the jobs they deserve.


Thank you. Your next question comes from Tapas Strickland from NAB. Please go ahead.

Tapas Strickland, NAB

All right. Good afternoon, Governor Lowe. I had a question around the forecast and whether today's policy package is incorporated into the forecast profile and if not, do an updated set of forecasts see unemployment and inflation going towards where you would consider full employment and towards the middle of the inflation target. Thank you.

Philip Lowe

Today's forecasts and the ones that were released on Friday, which have the same numbers contain today's policy decision and the reality we face is even with today's policy decision inflation's too low, and the unemployment rate is too high. If we hadn't moved today, the situation would have been more difficult with an even higher expected unemployment rate and lower inflation.


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

John Kehoe, Australian Financial Review

Thanks, Dr Lowe, I'm curious to know why the $100 billion figure was chosen for QE. Was there some back of the envelope calculation you're working on the potential impact on long-term bond yields and the Australian dollar. And also, how will you decide how to apportion the 20% of purchases that are going to be dedicated to state government semi securities? I mean, will it be done on their population, their GDP, or their debt to GDP. How will you work out that?

Philip Lowe

Why the 100 billion? It's a very good question. One advantage we have here of doing this a bit later than other central banks, we've got to observe what others have done. I've chaired a study at the Bank for International Settlements, which looked at the effectiveness of some of these monetary policy measures and we've been in close contact with our colleagues elsewhere.

While the estimates vary across the various studies, it's reasonably clear that a bond purchase program is equivalent to 5% of GDP, which is what $100 billon dollars a year is, has a noticeable and meaningful effects on long-term bond yields. And it can have an effect on the exchange rates. So the international experience suggests that so 5% of GDP was the benchmark we were using, and it turns out to be around $100 billion. If it turns out that that's the wrong number, we're prepared to adjust over time and we'll keep this under review at our meetings next year.

In terms of deciding how to allocate the semis' purchases across the various jurisdictions, we're going to use the relative shares in total debt outstanding. We've looked at various other rules. You could use population or state final demand. It doesn't really make that much difference in their real scheme of things so the easiest benchmark to use is their share in debt outstanding. And partly that's driven by the fact that we don't want to cause market dysfunction in any of these markets.

So if we buy a similar share of debt outstanding in each of them, we minimise the chance of causing market dislocation. Because it's really important these markets still work well, that there's liquidity in them, and that they send the relative price signals that they've done for years, expecting that will continue to be the case and the best way of doing it is to buy a roughly equal share of their debt outstanding. If we use a different rule, we'd come up with a very similar number though.


Thank you. Your next question is from Elysse Morgan from ABC. Please go ahead.

Elysse Morgan, ABC

Thank you very much, Governor. The first question is that you addressed why the RBA didn't go earlier with this, but not why you haven't waited, and go later, given that you've talked up growth and job creation, and Victoria is now opening up. And a quick second question, you've previously said that you would not do QE, you've now done it. You've also ruled out previously negative rates. Why should we believe you now, that you won't do negative rates?

Philip Lowe

Why not wait? We discussed this at our meeting today, the case for waiting and the conclusion we drew is that the outlook for the economy over the next two years was sufficiently concerning, particularly around the labour market that we should act today. I mean, you can always wait and hopefully things will turn out to be better, but as we've gone through recent months, it seemed pretty clear that we face a number of years of quite high unemployment. Our judgement is that, that would still look to be the case in December and in February when we met. And there was not much pointing in waiting, we better get on with it. We wanted to do whatever we can do to support jobs and get people back in earning income and in the labour market. And the faster we get on with that, the better particularly given that the economy is now opening up. And I think we will get some traction, whereas a number of months ago, as I said, we didn't think we'd get any traction.

Your second question was that we've done things that we said we wouldn't do. I've been careful in the past, not to say that we wouldn't do these things. I've said it's unlikely, we're not inclined to do it, and I think absent a global pandemic, we wouldn't be going down this route. Now we've been hit by the biggest economic shock in well over 100 years, we've seen many countries around the world output fall by 20%. It's staggering here in Australia we've had a very big decline in output, hours worked fall by 10%.

So I think and faced with that shock, we all have to go back and look at all the tools we have, and that's what we've done. We haven't been limited by our previous communication. Although I've tried to be careful in the past, not to rule out things and on negative interest rates, saying they're extraordinarily unlikely, and that remains our view. I'm not saying this will never happen. And if we saw, the biggest central banks in the world all go negative, then we would have to consider that. But I don't think the biggest central banks in the world are going to go negative. And I don't think we're going to go negative as well, but you know, I'm not completely and irrevocably ruling out, that would be foolish, but I think it's extraordinarily unlikely.

And other than the effect on exchange rate, if think would be unhelpful. But faced with the biggest economic shock in a hundred years, we like everybody else has had to adapt. And we're keeping in focus the need to get people back into jobs and earning incomes again. That's our number one priority.

Operator 5015

Thank you. Your next question is from Sofia Rodrigues from Central Bank Intel. Please go ahead.

Sofia Rodrigues, Central Bank Intel

Hi Dr Lowe, given the record number of monetary policy decisions today, your also dovish forward guidance and then to top it off by saying, if we need to do more, we can and we will. Is this the same as the ECB saying, we will do whatever it takes? Can that do the headline of my next article?

Philip Lowe

I wouldn't characterise it like that. When the ECB said it would do whatever it takes, it was speaking in terms of keeping the Euro together, keeping European project alive. We don't face that type of issue here. What we will do is to do everything that we can reasonably do to help the national effort, to get the unemployment rate down people back into jobs and earning incomes.

We will learn over the coming months, the effects of what we've done to date and whether there's a strong case to do more. If there's a case to do more than we will do it. I think it's too early obviously to pre-commit to doing more because we don't know what the next months are going to give us. And there's also the possibility of further government measures as I've been saying for some time how I'd like to see at least some of the state governments have further spending, particularly on infrastructure and programs that would directly create jobs and I know a number of the state governments have their budgets coming up.

I think our decision to buy their bonds, hopefully gives them some encouragement to do some extra spending which will create jobs. But we will keep reviewing the situation over coming months and if we need to do more, as I said, we have the capability to do it and we will do it, if we think it can help.


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

Su-Lin Ong, RBC Capital Markets

Good afternoon, Governor. You've said that you won't be buying any bonds that have recently been tapped or newly issued. Can you give us a sense of what timeframe that is? Does that mean you won't buy anything that's been tapped or issued in the last week, two weeks? What kind of timeframe?

Philip Lowe

We haven't got a hard and fast rule there, and my thinking at the moment is that if a bond has been tapped or issued in the last week, we will steer clear of that bond. We're doing that partly because we want to avoid any possibility that people see us as financing the government. I think if a government issues a bond on that week and we buy it at the same time, people could incorrectly assume we were financing the government. So we're very keen to keep away from any bond line that's just been tapped or issued. So I think a week is an appropriate distance, but we'll see both the market reaction and market depth around those securities.


Thank you. Your next question comes from Jessica Irvine from the Sydney Morning Herald, please go ahead.

Jessica Irvine, Sydney Morning Herald

Hi Phil. Is the recession over?

Philip Lowe

No, the recession isn't over and I'd have to say my colleague, Guy Debelle, did not say the recession was over as well. There was a lot of misreporting on that issue. What Guy said, and what I've said today, we expect GDP growth to be positive in the September quarter, and I'm hoping it's solidly positive. But a lot of people are out of work, a lot of businesses have closed, and a lot of people don't have their normal hours of work. The level of output is, I think right through this year and next year, going to be below where it was at the end of last year. So on any reasonable definition, we're in a recession, except for the technical definition of two quarters of negative growth.

So the economy is growing, which is good. We will be coming out of recession, but we are clearly in recession. There are so many people out of jobs and businesses closed, I don't know how anyone concluded that we're not in recession, other than someone who wants to take a very technical, narrow definition, which is not what we're inclined to do.


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

Vesna Poljak, Australian Financial Review

Governor, do you worry that lower yields will make it harder to complete the fundraising tasks necessary to fund the deficit?

Philip Lowe

Not at all. I think there's still very strong demand for Australian government securities. The recent bond options have been heavily oversubscribed. Both domestic and international investors find Australian government securities very attractive. They've got a still relatively high yield compared to many other countries, even though they're lower as a result of our decisions, still relatively high. Australia is an incredibly well run country. The level of public debt is still low. The credit ratings are very high, and investors find both federal government and state and territory government securities, very attractive and I don't think that's going to change.

The Australian dollar investments, the bonds issued by the Australian governments are very attractive. In a world of great uncertainty, the Australian economy is doing well. Public debt's low, the country's well run and we have tremendous opportunities in the future. So I would expect there will still be strong demand for these securities.


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

Michael Heath, Bloomberg

Hi Phil. Just wondering if you could confirm the basis of this program seems to be to bring down the Australian dollar, or at least take some of the drive to appreciate out of it. So is that correct?

And the other one is, if the opportunity opens up, would you be prepared to intervene, given the currency does seem to be the main factor you're looking at now?

Philip Lowe

Well, I wouldn't conclude that currency's the main factor. It's one of the factors. As I said, in the introductory remarks, there are three transmission channels through which this package helps. The first is lower lending rates. That will gradually give people more cash flow, and with that extra cash flow, they'll spend a bit more and maybe some firms will do a bit more investment. So that remains an important channel. Another channel obviously, is there's upward pressure, or maybe even downward pressure on the exchange rate, so that will help our exporters.

And the third channel is higher asset prices. I think that the fact that we've got lower interest rates and the portfolio substitutions that come from our asset purchases, will lead to some other asset prices being higher, and that will strengthen some balance sheets. The most obvious example of that is the housing market, where housing prices are rising rather than falling. With that, people's balance sheets are better and they might spend a bit more.

So the combination of those three things, the cash flow effect, the lower exchange rate and the stronger balance sheets will all, over time, not instantaneously, but over time that will lead to more spending in the economy, and there'll be more jobs. So it's incorrect, I think to conclude that this is mainly about the exchange rate, it's really about all those transmission channels.

Would we intervene in the foreign exchange market? Our position on that has been well spelled out, and hasn't changed for a long period of time. The only cases where we would intervene is if the market is dysfunctional, which it's not and the exchange rate's a long way away from where one can justify it based on fundamentals, which it isn't.

The fact that we would like a lower currency to help with job creation and boost the inflation rate isn't enough to get us to intervene, because we're realistic about what can be achieved. Intervening when the market's dysfunctional or you're a long way from fundamentals, I think you can be successful, but if the market is broadly in line with fundamentals, intervening isn't likely to give you any durable effect.

We might like the currency to be lower, but we've got to be realistic about what's achievable. In today's package, will at the margin lead to a lower currency than we otherwise would have had. And we've seen the Australian dollar depreciate over the past month, as people have realised that we might have a policy package. So it's not really just about the exchange rates. Cashflow and balance sheets are equally important. Thank you.