Transcript of Question & Answer Session From Recovery to Expansion

Moderator

Thank you for that. A really broad range of topics covered there and really glad that you addressed so much of the issues with regional Australia and agriculture. I might just start with the first question just around that regionalisation issue at the moment in terms of the shortage in the labour market, rents increasing. We are seeing a lot of regional stimulus coming from governments. Do you think it's well-targeted to address some of those issues?

Philip Lowe

I don't know enough about the details to know how well it's targeted, but it's a good problem to have isn't it? For many years, I remember the discussion in many regional communities was that people were leaving the communities and moving to the cities because there weren't the opportunities. So that has now reversed. So that's the good news, but the supply side has to adjust and it's taken a while to do it and while the supply side is adjusting, housing prices and rents are rising, which is causing some problems. But they're good problems to have in a way, aren't they? It's better than the alternative of not being able to keep people and having housing prices falling.

Moderator

Perhaps some questions from the floor, does anyone want to ask a question? I know we've got a few online that we can go to while people are thinking about it. So I might go to an online question … What indicators is the Reserve Bank seeing of the agriculture sector decarbonising through the COVID recovery?

Philip Lowe

I'm not again, sorry, close enough to the details to answer that, but I know it's an incredibly important issue. I participate in many international meetings … and a very frequent question that comes up in those meetings is what is Australian business doing to decarbonise? Many international investors are very focused on this issue and it's particularly important for the agricultural sector because roughly 70% of agricultural output in Australia gets exported. So you're relying on overseas markets and increasingly, overseas investors are asking about the carbon content of production, and that's a trend that's only going to continue. Australian agriculture has tremendous opportunities here, but we need to find ways to disclose to global investors and global customers, the decarbonisation strategy and how successfully we're doing it. So it's a really important issue and it's going to become more important.

Moderator

I might just get you to expand on that a little bit, because I know it's something that we were discussing last night at dinner about that disclosure aspect and the evidence base for not just decarbonisation but sustainability outputs more generally. How important is that that the evidence, the data of doing this, not just saying that we're doing it, but backing it up?

Philip Lowe

I think as the international focus increases on this issue, people are looking for stronger and more credible analysis and standardisation. I know in the area of finance where I work in, there are emerging templates, where financial institutions or businesses will be expected to disclose their carbon footprint and the international investment communities will be looking at those templates. There's some convergence around one or two of these and I think that's helpful. I don't know to what extent that the same convergence is occurring now in agriculture but we'll need, I think it's in our interest to have some credible, widely accepted templates that we can use to demonstrate the carbon footprint. So I think we're going to have a good story to tell here, but we need a mechanism to tell it.

Male

Could you comment on how well the government is handling productivity enhancing investments in infrastructure … you talked about it in your address the importance of productivity … Can you just talk to some of those infrastructure investment decisions, just how well we are placed, vis-à-vis our competitors …

Philip Lowe

Well, it's not my job to comment on government policy. The government doesn't comment on monetary policy and I don't offer running comment on government infrastructure policy and how well we're doing that, but I know the government has a strong focus on digital economy, on human capital, on education, and on infrastructure. They're all incredibly important elements of future productivity growth, and we'll all have different views about how effectively that's been done, but I think they are the right areas: digital, infrastructure, human capital, and I should add to that energy and people will have different views on the government's energy policy. But I think they're the areas the government is focussed on and they're the right areas. Now, our population had been growing quickly. It's not grown quickly in the past year, but it's been growing quickly over time. So we need the infrastructure to support the higher levels of population.

I imagine we'll go back once COVID is finished, to stronger population growth again. So we need infrastructure. Investment in human capital, in education is incredibly important as well. Australia has become wealthy over the past 200 years, partly by what's in the ground and what can be grown in the ground … And that's going to continue to be important, but increasingly important is what comes out of our heads, not what comes out of the ground. So investment in human capital, in education, in our university systems, in research and development and the infrastructure that supports research and development and commercialisation of that is important and the government has that as a focus here as well. So I'm sorry I can't offer comment on the particular projects, but they're the general areas, and I think the government understands those.

Female

Just a quick question around investment. You spoke about how there has been businesses that have been investing, probably driven by the instant asset write-off with tractor sales. Just wanting to delve in, with the industry looking to grow to $100 billion industry and AgriFutures … having identified there is a big investment gap in agriculture. What do you think would … assist in getting that long-term investment? You spoke about bonds, would that be something that could assist agriculture being able to invest in the long term, not just short-term?

Philip Lowe

At the end of the day, I don't think financing is a major issue here. If a business, a farm, has good ideas, good management, good technology, in the end they can find some financing. It may be not that easy and it might be a bit hard and they have to go through a few different routes, but there is a very large pool of global savings and a large pool of Australian savings who are looking for a home. So if you've got good ideas, good management, good technology, and a good business plan, there's money available. The reason we have low interest rates at the moment is that lots of people want to save and not many businesses want to use those savings to invest in new capital. Now people blame the central banks for the low interest rates, but we're really responding to this savings and investment dynamic. So there's plenty of money there. What we've got to see is good ideas, capacity, and willingness to take risk and good business plans. If all those things are there, the money can be found.

Female

We saw recently that New Zealand is looking to impose debt-to-income ratios … to slow the housing market. Just wondering if the RBA is considering that and secondly if you were to consider that, do you think that would have any implications for regional areas more broadly?

Philip Lowe

Well, the Reserve Bank really doesn't control this area of policy. In New Zealand, the central bank does monetary policy and prudential supervision. As you know, here we have the Reserve Bank and APRA does prudential supervision. As I said in my prepared remarks, at the Council of Financial Regulators meeting last week, which I chair, we had a discussion about what might be the appropriate options to employ if housing credit growth accelerated and was outstripping growth in incomes. I don't think it's in the country's interest to have an extended period where credit growth is running way ahead of growth in our incomes, particularly given the higher levels of debt. So we've worked through together with APRA what the options would be there, and they include looking at debt-to-income ratios, loan-to-value ratios and the type of restrictions we saw a few years ago on investor and interest-only lending as well.

So we're not at the point where we're actively considering implementing any initiatives in this area, but we're doing the preparation for what might happen, what we might do if credit growth was accelerating. But whether it would impact regional Australia more than the cities, I'm not sure. It would depend upon the nature of any particular restrictions that APRA introduced. We've got some way to go though before that's likely to happen.

Moderator

We've another online question, and then I'll come to another one from the floor. Is the RBA concerned that short-dated government bonds trading at negative yields is a sign that the cash injection is contributing to bond market dysfunction?

Philip Lowe

Not at all. The bond market's working well at the moment. There's a high level of liquidity, the bid-ask spreads are narrow. We're seeing at the short end of the yield curve, interest rates are essentially zero because there's a lot of liquidity in the system and people are looking for a home for that money, and when that happens, they look for government bonds. They force up the price of the government bonds and the yield comes down to zero. So it's a reflection of the plentiful liquidity in the system and from my perspective, that plentiful liquidity means that banks have the capacity to lend; there's plenty of money and the cost of finance for the banking system is very low as well. So it's all part of the strategy and the bond market is working perfectly well at the moment.

Male

I'm mainly a macadamia farmer these days. Do you think there's any likelihood of … pressure on inflation as a result of the sort of unprecedented reduction in immigration which has taken place over the last 15-18 months and who knows what's going to happen in the next 12-15 months. Thank you.

Philip Lowe

It's a good question. I think the main effect of the closure of the borders on the labour market is that we can no longer tap the overseas labour market for areas where workers are in short supply. So what used to happen before the pandemic is if there was a shortage in the labour market for a particular skill, firms could go overseas and tap the global labour market. And that meant that if there was very strong demand for workers of a particular skill, the price, the wage didn't really move very much because you could go and get workers from overseas. You can't do that at the moment, or at least it's very hard to bring in workers with skills. So it's not necessarily the level of immigration that's the main factor here, it's the ability to tap global labour markets for areas where there's a shortage of supply and we're starting to hear reports of wages moving for some of those jobs.

But as I said in my remarks, other firms are saying, well, we don't want to bid up the cost base now because perhaps towards the end of the year, there'll be a way to get workers to come back in with skills that we really need and that'll alleviate some of the pressures. I think if that doesn't happen and we're still in this position in a year's time where we can't get workers, where skills are in short supply, I think we'll see more upward pressure on wages and inflation. So it's one of the uncertainties, how long it will be before we can once again tap global labour markets.

Male

I just wanted to understand this super remarkable V-shaped recovery … Are you able to look back at that data … with a view of trying to understand how we keep that recovery going? It still seems remarkable that that's happened …

Philip Lowe

Well, the main driver of the recovery has been the bounce-back in consumption. It turns out that if you give people a lot of money and allow them to spend it, most of us spend it. We save a bit, but we don't save it all. And what we've seen in Australia, the government give large amounts of money to both households and businesses and once the health situation improved sufficiently that most of us could go about our lives relatively normally, we found ways to spend most of that money. People kept their jobs, so they're not worried about unemployment, so uncertainty declined and we've spent a lot of that money. Sensibly, we've saved some of it and that's a large part of the economic recovery. It's a positive story.

The improvement in the agricultural sector has obviously helped as well. The recovery from the drought is a large part of that story, but the high prices globally for food products is helping as well. But it's mainly the household sector being resilient and being prepared to change their patterns of spending. When people used to go overseas, they spend their money abroad. Now they don't do that, they're spending it domestically. So there's huge amounts of substitutability in what people are prepared to spend their money on. So many of the holiday destinations within Queensland, and I know in New South Wales are very heavily booked, as people have shifted their patterns of spending, and that's creating jobs here. The household sector has been remarkably resilient, and they've been prepared to change their patterns of spending and the economy is the better for that.