Speech Transcript of Questions & Answer Session Today's Monetary Policy Decision

Moderator: The first question is from Patrick Commins from The Australian. Over to you, Patrick.

Patrick Commins, The Australian: Thanks very much, Judy. And thank you, Governor. Can you describe a possible scenario in which inflation is within the target range, and sustainably within that target range, without wages growth being at around the 3 per cent or more mark?

Philip Lowe: We're in the world of hypotheticals here, but from first principles, if there was very, very little productivity growth in Australia, let's say productivity growth was zero, then inflation of 2.5 per cent would go with wages growth of 2.5 per cent. No growth in real wages. I'm optimistic that the country can deliver ongoing productivity growth and we are factoring in at least 1 per cent productivity growth. So if we can deliver 1 per cent productivity growth and we have 2.5 per cent inflation, then on average wages should be increasing at 3.5 per cent. But if we don't have productivity growth, then nominal wage growth that goes with any given rate of inflation is lower. I think it really points to the need for the country to again refocus on the productivity agenda, because that will allow us to have faster wages growth. Judy?

Moderator: The next question we have is from Ron Mizen from the Fin Review. Ron, if you'd like to ask your question?

Ronald Mizen, Australian Financial Review: G'day, Governor. Sorry, camera's not working, but thank you for the conference today. A little earlier this year, you said that the expectations around rate hikes later in 2022 were difficult to reconcile with the picture that you were painting of the economy. What do you make of rate rises being priced in as early as February, March next year?

Philip Lowe: I think that's a complete overreaction to the recent inflation data. As I said, the test that we've set is inflation sustainably within the 2 to 3 per cent range, which means inflation's got to be more than just 2.1 or 2.2 per cent for a couple of quarters. We've got to see inflation up around the midpoint of the target range and be confident that it's going to stay there. I'm not sure how we would get to that state of the world and be in a position to raise rates early in the new year.

It seems a long way from where we are now and it's not consistent with our reaction function. So I still struggle with the scenario in which rates need to be raised next year. Things would have to turn out very, very differently than what we currently expect. The factors that have kept wages growth in Australia low for a decade would have to reverse and inflation would have to jump up. Not impossible, but I would say it's extremely unlikely.

Moderator: Ron, do you have a follow-up question or is that it?

Ronald Mizen: No, that's great. Thanks, Judy.

Moderator: Great. The next question we have is from Richard Yetsenga. If you could ask your question, Richard?

Richard Yetsenga, ANZ: Hi. Thank you. Thanks, Governor, for those comments. The activity side of the economy has surprised the Bank and many forecasters over the past year. Upstream inflation indicators and inflation expectations have surprised many forecasters over the past year and you've adjusted your view for those, but still seem to have the next link in the chain kind of unchanged, which is that the shift from those indicators through the wage structure is going to be very slow and gradual. It doesn't seem like anything else about this cycle has been slow and gradual. What's the prospect you get, maybe, pleasantly surprised on that side, as well?

Philip Lowe: We have upgraded both our inflation and wage forecasts. I mean the inflation forecast for the current year is being revised up half a per cent. So we originally, or back three, six months ago we were seeing upside surprises on the economy that was in turn reflected in the forecasts. And just very recently, we saw an upside surprise on inflation and that's now been incorporated into our forecasts. So whether there are further upside surprises will really depend on two factors. The first is the rate at which the disruptions to global supply chains are resolved. I think it's quite plausible that over time, the demand for goods slows as people move back to services. And while that happens the supply chain problems get resolved. So we could have fewer demand for goods, supply side problems get fixed up and the price pressures in the global system come out.

That's an entirely plausible possibility. If that doesn't happen, then we'll see more foreign inflation coming into Australia. That's one issue. And the second is what happens in the labour market. The last time wages growth in Australia was above 3 per cent was almost a decade ago. And we even had experienced a few years ago where the unemployment rate in New South Wales and Victoria was 4 and 4.2 per cent. Wage growth was sub two. And we're seeing an experiment at the moment in Western Australia, effectively a closed economy and a very low unemployment rate, and their wage growth has picked up a bit, but it's still kind of modest.

Our working hypothesis is that the factors that have been at play here are going to continue to be at play. They'll gradually wane as the labour market tightens. But to think the decade long decline in wages growth is going to be reversed in just a few months. It's a long way from our central scenario that could happen. Things would have to change dramatically. I'm hoping that the wage growth picks up a bit more than we currently forecast, but the factors that have kept it down are pretty strong.

Richard Yetsenga: Thank you.

Moderator: Thank you. The next question is from Chris Read. Chris, if you could unmute yourself.

Chris Read, Morgan Stanley: Hi there. Thanks, Governor. My question's around the economic forecast. Could you just clarify, are the forecasts you've presented today, do they incorporate the current market pricing for cash rate hikes? And if that is the case, maybe could you just elaborate a bit on how the pretty substantial change we've seen since the previous forecast round has impacted on those forecasts? Thank you.

Philip Lowe: The forecasts were prepared a week ago before the big jump up in the OIS curve and interest rate expectations. They do incorporate the market path a week or so ago. If we incorporate the current market path, it would make very little difference to these forecasts because the interest rate increases are back-ended in our forecast horizon and we know there are lags in the relationship between interest rates and activity and the Phillips curve at the moment is very flat. You've got to have a big shift in activity to cause the inflation forecast to change very much. I think we're really talking at the decimal point dimension if we were to change the interest rate forecasts or the interest rate assumption in our forecast.

Chris Read: Very clear. Thank you.

Philip Lowe: So back-ended and the lags in the system, it doesn't make that much difference to the particular set of numbers. It could make a big difference to ‘24 and ‘25, but we're not currently producing forecasts for those years. Thank you, Judy, back to you.

Moderator: Great. The next question is from Tapas Strickland, if you could unmute yourself.

Tapas Strickland, NAB: Thank you, Judy and good afternoon, Governor Lowe. Just given that you have noted that it is now plausible that a lift in the cash rate could be appropriate in 2023, as opposed to 2024, does that imply the RBA has little tolerance for inflation being sustained higher than 2.5 per cent? And I just wanted to get your feeling on your tolerance for inflation overshooting the target. Thank you.

Philip Lowe: We want to get it to the midpoint of the target first. As I said in my prepared remarks, at the end of ‘23, we're expecting inflation to just get to 2.5 and wages growth just get to three. In my view, that in and of itself does not justify higher interest rates. It could if the trajectory was onwards and upwards, but we are prepared to be patient. We want to see inflation get sustainably back to 2.5 per cent and we want to see the unemployment rate come down. That obviously runs some risk of inflation overshooting a little bit. And obviously that's a possibility, but we really want to make sure that we can deliver this 2.5 per cent rate of inflation.

And we're going to keep interest rates where they are until that happens. That does run some risk that inflation will be too high for a while, but it also runs risk that once again, inflation will be too low and that's what's happened over the past decade. So there's uncertainty here. I don't know whether that's answered your question or whether you're going to follow up?

Tapas Strickland: No, that has answered the question. Thank you, Governor Lowe.

Moderator: Great. The next question is from Will Koulouris from CNBC. Will?

Will Koulouris, CNBC: Thanks so much Governor for today. Just in terms of some of that uncertainty, there is obviously an expectation, I suppose, that we are going to see those great hikes coming through. You're hoping to get that wages growth, but if you look at the timeline, it almost coincides with when we're expecting some significant migration to start to come back to Australia. So do you have concerns that perhaps we might not meet the wage target within that timeline? And if so, does that mean that you're going to maintain that firmness on your rate settings?

Philip Lowe: If wage growth doesn't pick up and we have productivity growth, linking back to the very first question, then we'll be undershooting the midpoint of the inflation target, and we won't be raising rates. I think the opening of the border is an interesting issue. It's going to have multiple effects. One is that people with skills in short supply will be able to come into a country and we all know there are a lot of hotspots in the labour market at the moment, and that will help resolve some of those hotspots.

On the other hand, there are many Australians who have been effectively locked down for a year, or better part of a year, who really want to travel overseas. For many young Australians, travelling overseas is part of what they do, it's a part of their work program and their career and I think there's a big backlog of people who will want to do that. So there are going to be both pluses and minuses when we open the international border. And I think it's hard at this point to determine what the net effect of those will be on the labour market. I think in the short term it will probably reduce the pressure in hotspots. Whether it has broader effects beyond that, I'm not sure.

Moderator: Great. Thank you very much. The next question is from Shane Wright from The Age and The Sydney Morning Herald.

Shane Wright, The Age and Sydney Morning Herald: Good day, Dr Lowe. I just want to keep coming back to wages growth. What confidence do you have that you can reach 3 per cent? How important is the cash rate at 0.1 to getting to that 3 per cent? And for those in the market who've priced in this rate increase through next year, what would a quarter or 50 basis point rate rise do to wages growth?

Philip Lowe: I just want to be kind of clear, we don't have a target for wages growth of 3 per cent. Talking about wages growth of 3 per cent, it was really in the context of the calculations, I was articulating a response to the first question. If we're going to have 2.5 per cent inflation and 1 per cent labour productivity growth, then in the steady state, we need wage growth starting with the 3. So that's the configuration we're talking about, but if we have weak productivity growth, then obviously the wage numbers will be weak from that. How confident are we that we are going to get there? I think it does remain an open question, but our judgement is that if we can sustain an unemployment rate in the low fours for a while, firms will have to compete more aggressively for labour. They'll be offering higher wages to attract workers and they'll be giving their own current workers a bigger pay rise. There's uncertainty around that though because the last time we had the unemployment rates for a sustained period in the low fours was in the early ‘70s. A very different economy then. It wasn't an open economy – it was closed – and a very different world so, we cannot be confident about how wages growth is going to respond to an extended period of low unemployment.

But I have a reasonable degree of confidence that, at 4 per cent, firms will be competing more strongly for workers and we already see this at the moment. With the current rate of unemployment, the mid fours, many firms are telling us that it's very hard to get workers, and their first response is to offer increased flexibility or bonuses or something to not embed in a higher cost structure, kind of one-off things. So, I think, and this will hopefully be tested when we get the unemployment rate even lower, the short-term responses will have to translate into stronger wages growth, but rightly there's uncertainty around that.

Moderator: Great. Thank you. The next question is from Peter Ryan from the ABC.

Peter Ryan, ABC News: Yes, good afternoon, Governor. Look, I was just wondering what, if any, discussion there was about housing in today's board meeting given the continuing surging house prices, and whether any concern was registered and whether or not the Reserve Bank does see some role in partly trying to cool those prices?

Philip Lowe: Well, at today's meeting we didn't discuss housing in any detail. We had an extensive discussion at the last meeting and we had devoted our time today to discussing the yield target. In the statement that was released at 2:30pm, it said that the Bank welcomes APRA's decision to increase the loan serviceability and buffer; that was a sensible thing to do in the current environment. The last part of your question was, is the Reserve Bank going to use, effectively, interest rates to contain housing prices? And as I've said before, that is not on our radar screen, it's not something we're contemplating and I don't think it would be appropriate. Certainly a lift in interest rates now would take some of the steam out of the housing market, but it would also mean fewer people had jobs and wages growth would be even weaker than it currently is. That doesn't sound like a very good trade off to me and it's not one that we have a mandate to make, or even, I think, it's appropriate to make. It's more important that people have jobs and their wages are rising reasonably well.

If the society is concerned about rising housing prices I don't think the solution is higher interest rates. The solution is the structural things that have given us structurally higher-level housing prices, and that's the way we design our cities, the urban form, the tax incentives that are provided for investment in housing, where we choose to live and the transportation networks. They're the things that, when you look across countries, they explain the variation in housing prices. So if as a matter of public policy it was considered important to address the level of housing prices, they're the things we should be looking at. I don't see higher interest rates as a solution to high housing prices, especially when higher interest rates come with fewer people in jobs and lower wages growth.

Peter Ryan: And if I could just take my follow up there … through the Council of Financial Regulators, there's been some commentary about whether or not lending standards are remaining solid. Are you seeing any evidence at all given the level of loans being given out and, I guess, the fear of missing out that there could be some risks about lending standards?

Philip Lowe: At the moment I don't have any concerns about the deterioration of lending standards. Most of the lenders understand the risk in the macro environment and the lending standards are broadly appropriate. I do think that both lenders and borrowers need to be aware that interest rates will rise again. They're not going to rise again quickly, and as I said today, I think they're not going to rise next year. I think the most likely case is still ‘24, but it's possible that they go up in ‘23. So when people are making their borrowing decisions, they need to factor that into their calculations. And my hope is that the increase in the loan serviceability buffer reinforces that message; that interest rates go up at some point and you need to be prepared for that. At the moment I think banks understand that and I hope borrowers do as well.

Moderator: Next question is from Ian Rogers from Banking Day. Over to Ian.

Ian Rogers, Banking Day: Yeah. Good afternoon. Dr Lowe, I was hoping you could unpack the supply chain considerations for us. Landed prices and producer prices are already taking off in select categories. Do you have much sense about when these dilemmas are going to resolve?

Philip Lowe: That's a good question. I wish I had a good sense of it. I think it's useful to kind of step back and look at the big picture here. What we have seen during the pandemic is households right around the world, switch from consuming services, because they couldn't, to consuming goods. We bought office equipment and home exercise equipment and stuff. So there's been very strong demand for goods globally and weak demand for services. Just at the same time that there was strong demand for goods, the ability of the global production system to produce goods was diminished because of factory shutdowns and COVID.

So we've got strong demand for goods, impaired supply capacity, what do you think is going to happen to the prices? They go up. And that's exactly what we're seeing for commodity … good after good. And the strong demand for goods is also being reflected back into the markets for energy and materials, base metals and stuff, so the prices of those have gone up as well. I think the issue we're grappling with here is what does the situation over the next 6 months look like? I think it's imminently plausible those economies open up – people will go back to consuming services, going to restaurants and travelling again – and buying fewer goods, buying fewer home exercise equipment and stuff for your house. So I think that rebalancing in consumption will take place. As that takes place, the supply chain problems are going to be progressively resolved as well.

So it's quite possible, and this would be my base case, that in 6 months’ time the supply side problems look less troubling, and we'd see that in the global inflation numbers. And I hope less upward pressure on inflation here as well.

Ian Rogers: Thank you.

Philip Lowe: There's a lot of uncertainty around that because … People talk about supply side issues, largely supply side issues because of strong demand. COVID affected production ability, but the bigger picture here is very, very strong demand for goods around the world, and that pushes up the pressure on prices. I think that will normalise now as people go back to travelling and entertaining themselves. Judy, thank you.

Moderator: Great. The next question is from Sophia Rodrigues from Central Bank Intel.

Sophia Rodrigues, Central Bank Intel: Good afternoon, Dr Lowe. I've noticed that your unemployment rate forecasts are unchanged, but you have upgraded inflation and wage growth forecasts, which to me means that there are factors other than a fall in the Phillips curve, as a factor for a rise in wage growth. So my question is, are you underestimating the impact of high inflation on wage growth in terms of past inflation outcomes leading to higher wage growth number one? And number two, is there also possibility that you are a bit conservative on unemployment rate forecast? And if that falls faster, and if that falls below 4 per cent, we could see faster wage growth. So what are the factors that could lead to an upside in wage growth forecast?

Philip Lowe: Well, the scenarios you talk about, of course, they're both possible, I just don't think they're particularly likely. You've got to remember at the moment that underlying inflation in Australia is 2.1 per cent, after a number of years where it's been below zero. So it's not like we have a major inflation problem in this country, we don't. Headline inflation is higher at the moment around 3, but that's largely because of oil prices and the home construction costs, but we don't have an inflation problem in Australia. And I doubt whether, in wage negotiations at the moment, the higher rates of inflation are going to feed quickly through into higher rates of wage inflation. It's possible, but I think it's quite unlikely.

The second part of your question was, could the unemployment rate go even lower? Again, it's possible. That would take us back to where we were in the 1960s – an unemployment rate starting with 3. If that were to happen, then I would expect that wages growth would pick up more quickly, but at the moment, I'm hoping we can get the unemployment rate down to 4 per cent and see what happens there. The scenario you're talking about is possible, but doesn't seem particularly likely at the moment.

Sophia Rodrigues: But what is the reason you've not upgraded unemployment rate forecast. Are you still expecting high fives for the unemployment rate?

Philip Lowe: No. When Delta hit, there was a lot of uncertainty about how the unemployment rate numbers would wash out, whether people would be recorded as unemployed or be recorded as leaving the labour force when they were stood down, and at least to date, most of the people who are no longer working are reported as being out of the labour force, so the unemployment rate hasn't risen that much. In the next couple of months, I think the unemployment rate will go a little higher as people come back into the labour force, but there's a lot of measurement uncertainty. So the unemployment rate, I think, is not going to go above 5 per cent now, but it wouldn't surprise me if it did, if there was some quirk in the measurement of employment versus labour force.

And the other part of the question was, why is inflation picking up if unemployment isn't lower? It's largely due to the supply side issues that are affecting the price of imported goods and the very strong demand for residential construction at the moment, it's pushing up the cost of both domestic and global inputs. So it's the supply side things driving higher inflation. I think in time, as I said before, there'll be some normalisation of supply and demand for goods. And in time, I think we'll also see normalisation in supply and demand for residential construction as well, and that will take away some of these inflation pressures that people are worried about at the moment. I'm hoping that they will be replaced with stronger upward pressure on wages.

Moderator: Thank you.

Philip Lowe: Back to you.

Moderator: The next question is from Stephen Halmarick from the Commonwealth Bank.

Stephen Halmarick, Commonwealth Bank: Hi Governor, thanks for doing this. Just back to the inflation forecast. So with the benefit of watching other economies overseas open up, and we can see a fair amount of non-trivial inflation elsewhere around the world and central banks seem to be responding to that. What gives you comfort that we're not going to see that in Australia, or it's not going to be till 2023 that we might see that more persistent higher inflation? And my follow up question would be, how does that feed into the bond purchase program? So you've got it going at $4 billion a week until February next year. So what's the decision-making process beyond that, whether to taper, extend, end the program come Feb?

Philip Lowe: On that second part of the question, I don't want to speculate on that at the moment. We've got these criteria we're going to use, what other central banks are doing, how our bond markets are functioning and the progress we make towards our goals. So they're the questions we'll be asking ourselves, and we are making faster progress on inflation so that would have logical implications, but I don't want to speculate on those yet. We'll decide those at our February meeting.

The first part of the question was why inflation here isn't picking up as strongly as it is in some other countries. In the US at the moment, the Employment Cost Index, which is their closest equivalent to our Wage Price index, is rising at nearly 5 per cent. Our Wage Price Index was rising at 2. So there's something going on that's quite different in our labour markets. I think in the US there has been a big fall in labour force participation. That's largely because of COVID.

In the US they weren't able to keep effective contact between employer and employee like we did in Australia through the JobKeeper program, so firms are keeping their workers attached to them. And in the US the incidence of COVID has been much higher, so people have had to leave the labour force to look after others and because they were sick themselves. So when you put together JobKeeper and a lower incidence of COVID in Australia, that's helped keep labour force participation up, which gives us different wage dynamics and there are other structural factors that I've talked about on other occasions as well.

I think one other difference between Australia and many other countries at the moment is what's going on with electricity and gas prices. In Europe as you know, they're both going through the roof. In a number of other countries, that's the case as well. Utility prices in Australia over the past year have declined, not skyrocketed. We had big price rises in earlier years but recently, price growth in utilities has been negative or very modest, and I think that's going to continue to be the case as well.

So the labour market's different and the energy complex is different, with the exception of oil, obviously, but both those things I think are a reasonable basis for us to expect that inflation will be lower here and not pick up as much. Now having wages grow at sub 2 versus close to 5 is quite different for the inflation outlook.

Moderator: Thank you.

Stephen Halmarick: Okay. Thanks.

Moderator: The next question is from Michael Heath from Bloomberg. Over to you Michael.

Swati Pandey, Bloomberg: Hey, the question is from me, Swati.

Philip Lowe: Please go ahead.

Swati Pandey: Could you provide a timeline and some colour into the board's decision to craft a new pathway? The context of my question is that the RBA decided to not buy bonds last week, whereas the actual board decision happened to say. So how did that happen? How did the RBA Dealing Room make this call last week and how large an impact did the inflation data play … A different kind of run up to the timeframe on how that happened, that would be great.

Philip Lowe: Yeah, perhaps go back a couple of weeks when in response to stronger inflation data around the world, all yield curves moved up, including here in Australia. And for a few days, the yield on the April ‘24 bond was close to 20 basis points. We stood out of the market for a couple of days as we waited for the market to kind of settle. And when it settled in the high teens, as you know, we bought $1 billion of bonds and the yield came back towards 10 basis points, but didn't come all the way back.

Now, we then decided to wait a day and see what the CPI would deliver. And the CPI delivered as you know, a higher than expected underlying inflation. And then internally within the Bank, we faced the choice. As I said in my prepared remarks, do we go and defend the target which we understood to be losing credibility for underlying reasons because we were making faster progress towards our goals, so do we go and try and defend that? Or do we wait until the board meeting and get the Board's views on the latest forecast and their implications for the yield target? We discussed that very extensively within the bank, and as you could always imagine there were different views, and in the end I decided that the better course was to wait and get the Board's views on whether they wanted to continue with the target or to drop the target.

Swati Pandey: Was there an earlier Board meeting?

Philip Lowe: Sorry?

Swati Pandey: Was there an earlier meeting of the Board last week?

Philip Lowe: No, there was not. As the Governor of the Bank, I have some discretion around issues like this and I decided that the best course of action was to use that discretion and discuss it with the Board today, and they agreed that was the right course of action. And I think just one other consideration, we obviously discussed this a lot internally beforehand. If we had an interim Board meeting phone hook-up before today's meeting, then we would've had to make a statement about that and making a statement before the regular meeting, you can imagine how that could go wrong. So we workshopped, I can assure you, every possibility and after listening to all the arguments and working through with my colleagues we made the decision to stand out of the market and to talk about it with the Board today, and that didn't preclude the Board deciding today, they wanted to keep with the yield target.

I would've had a different communication message this afternoon if that's what we decided, but going into the meeting that was a possibility, and we discussed the merits of that possibility today. And the Board agreed that this was the right course of action, and they agreed with how the last few days were handled as well.

Swati Pandey: Okay. I just had a follow up question as well. Could you have still bought the bonds to defend the target because it was still your target until 2:30pm today? You could have defended it and then decided today that [inaudible].

Philip Lowe: We could have and there was a reasonable argument to do that. We had this target and you could argue, we should keep on buying the bonds until we had formally dropped it. There are a couple of considerations in not doing that. The first was that with yields having moved so much, the swap curve moving so much and all the other rates moving so much, it would've been difficult to achieve the yield of 10 basis points. In fact, I don't think it would've been achievable.

So we would've been buying these bonds, buying all the freely floating stock and not achieving anything. So that didn't seem a sensible thing to do. And I think the other consideration was a communication one. If we had done that, then you would've rightly been asking today, why we continued buying this bond which was ultimately unsuccessful, in the full knowledge that the distribution of risks had shifted in a way to make the target unsustainable. So as I said before I used the discretion that I have as Governor to stand out of the market. We have stood out of the market on some previous occasions – not as dramatic as this one, okay – but I thought that was the best course of action.

Thank you. Ricardo, I can see your hand up next.

Ricardo Goncalves, SBS: G'day Governor, if you can hear me.

Philip Lowe: I can hear you, yes. So you go ahead.

Ricardo Goncalves: Fantastic. I appreciate you making yourself available, but I think it caught many people off guard given the call details were at the end of the statement today. So why the hastily convened call? And can we expect this type of format more often or after another, after each meeting?

Philip Lowe: Why hastily? Well, we don't want to kind of announce the webinar in advance because that would kind of provide a signal in itself about the decision. My strategy here is to have a media conference or a webinar when we're making important announcements. I don't think, at least at the moment, I don't see the benefit of doing this every month because a lot of the time, hopefully there's not very much to say and I give a lot of other public speeches. So, my motivation is really to speak when I've got something important to say. We made an important decision today. I know it's a decision that's been the focus of a lot of media and market interest. And I thought it was appropriate that I explain what we have done, why we've done it and to answer your questions. So, when we've got something important to say, then I would plan to do either a webinar or a media conference, but I feel like I've got to have something important to say, rather than just speaking for the sake of speaking. You can hear too much from your central bank.

Moderator: Ricardo, do you have a follow up question?

Ricardo Goncalves: No. Very good. Appreciate it. Thank you, Governor.

Moderator: Okay. The next question is from Phil O'Donaghoe from Deutsche Bank. Phil?

Phil O'Donaghoe, Deutsche Bank: Thank you very much, Governor, for your remarks today. I actually have a follow up question to a recent question from Bloomberg and that is in relation to your discretion around the yield curve target. I was wondering whether that discretion that you hold as Governor also extends to the bond purchase program? And my second question is whether you can envisage another shock, probably needs to be of the same magnitude as COVID, but could you potentially see another shock down the track where the RBA would consider reintroducing a yield curve target? Or has the experience of the last week perhaps led to a bit of a strategic rethink about the usefulness or the effectiveness of trying to have a practical expression of forward guidance?

Philip Lowe: Discretion extending to the bond purchase program, it's not something that we've discussed at all with the Board and I don't see the need for any discretion. We're really locked into the current process. We'll talk about it at future Board meetings, and there's no sense I have any discretion to make a change of direction there. I think if we were to change the direction ahead of February, there would be a special Board meeting on a particular topic. But I don't want to give you the impression that's even a remote possibility, because it isn't. We'll make a decision there in February and not before.

In terms of the experience with the yield target, we'll have to evaluate that fully as time goes by. It was very much a policy for a specific period in our history. I look back at the explanation I gave in March last year when we introduced that target. And part of the explanation at the time was that we wanted to directly target a yield curve, rather than buying government securities, so doing quantitative easing. We elected at the time not to buy bonds, but to directly target the yield curve. I thought that was the right thing to do at the time. As time passed, other central banks were doing quantitative easing, and I thought we were paying a cost in financial markets for not doing that as well, so we went back and did the quantitative easing that we elected not to do in March.

I think, putting all that experience together, it's quite unlikely that we would have a yield target again. Not because of the experience of the past week, but it was a particularly unique set of circumstances and at the time we elected not to do quantitative easing. Well, that's now obviously changed and we did that, so I don't think it's likely that we'll do this again, but who knows? In January 2020, I didn't think we'd be doing it a couple of months later, so stuff can change, but it's pretty unlikely.

Moderator: The next question is from Justin Fabo, from Macquarie Bank.

Justin Fabo, Macquarie Bank: Hi Governor. Thank you very much. It's very useful. I just want to ask a question about the global side of things here. We have monetary policy settings still in most places calibrated for a pandemic, and actually expectations that the macro outcomes will turn out to be much worse than they have, I think that's fair to say. Clearly central banks are starting to edge away from those settings, but in Australia, the RBA, and then you've got the Fed now placing a lot of emphasis on actual outcomes, rather than the forecast, the RBA and Fed sticking to the old way of doing things.

What's the risk here, thinking maybe 18 months down the track – maybe it's a year down the track – we have these extremely expansionary settings, inflating asset prices across the board. I know nothing keeps you up at night, but do you worry at some point that central banks globally, including us, have to play catch up here in terms of policy settings? And when we actually get to that point, the fact that asset prices are so high and might be even higher is a real risk in terms of what might happen when you start to tighten policy. Thanks.

Philip Lowe: Yeah. It's a remote possibility. I can't say it has zero probability of that scenario developing. I think what gives me confidence it's not going to overrun us is that there's a lot of inertia in our labour market. Ultimately, we're only going to have an inflation problem if wages are growing much faster than 2.5 per cent plus productivity growth.

There's so much inertia in our system. We've got multi-year contracts. The award system wages only get reviewed once a year. There's this very strong cost control mentality in Australian business. That'll probably diminish over time, but it'll take time, so I think the likelihood of this getting on top of us and finding ourselves with too high inflation is quite low.

If we do find ourselves in a position where inflation picks up too quickly, we will raise interest rates to deal with that, and the fact that debt levels are quite high at the moment means that interest rate increases will be quite effective, because people have more debt, so the cash flow channel is more effective when people have more debt.

Not a zero probability event, but I think pretty low, and we would raise interest rates in that scenario, and I think that would be effective in slowing things down because of the high level of debt. Whether we get it right, who knows? That's our general thinking.

Moderator: We're running close to 5:00pm. We'll just take 2 more questions. One from Alicia Barry from the ABC. Alicia?

Alicia Barry, ABC News: Yeah. Thank you so much, Governor, for your time. Very quickly on the yield curve control, would you say markets essentially forced you to drop the 0.1 per cent target on the April 2024 bond. That you lost the battle there?

Philip Lowe: I wouldn't say that, and I just don't think about it as a battle between a central bank and the markets. I know some people like to dramatise it in that way, but I don't. I don't think of it in those terms at all. What financial markets are doing and what we did today was to respond to the better than or stronger than expected progress towards our goals.

Now, it wasn't a battle between us and the market. I recognise that when we make faster progress towards our goals, then we have to change, and that's what we did today. And we didn't do it because of market pricing, we did it because it was the right thing to do and it was consistent with our framework. So it's not as exciting as a battle between the central bank and the market, but we thought this was the right thing to do, and we're making faster than expected progress towards our goals, and have responded to that.

Alicia Barry: I appreciate that. Thank you.

Moderator: And the last question will be from Wayne Cole from Reuters. Wayne?

Wayne Cole, Reuters: Hi, can you hear me, Governor?

Philip Lowe: I can. Yes. Go ahead, Wayne.

Wayne Cole: I can't get my camera on. When you do finish QE, I was wondering, what do you plan to do with all the bonds? You'll have hundreds of billions of dollars of bonds. Are you just going to keep rolling them over? You're going to let them mature at some point. What then do you do with the cash that you've created? All this, hundreds of billions of dollars are going to be sitting on your balance sheet. Are they just going to stay there as cash? Are you going to invest them in something? Where is it going to go?

Philip Lowe: Well, our plan is to hold these bonds to maturity, so we'll have the bonds as the asset and the offsetting liability will be the settlement balances, and then, as the bonds mature, the government will repay us and our balance sheet would shrink when the government repays us, so that is the plan.

A number of other central banks are having to confront the issue of maturities, and whether they continue to buy bonds in the face of maturities. We don't really have to face that issue for at least another year. The Australian yield curve, at least the early part of the yield curve, there are gaps of a year between the maturities. In some other countries, there are gaps of just a few months, so they're having to focus on reinvestment all the time, whereas we don't really have to focus on that issue for quite some time.

When the time comes, we'll make a judgement based on the state of the economy, but it's a perfectly sustainable situation for us to have a balance sheet with a lot of government bonds we hold to maturity, a lot of settlement balances, and on the date of maturity the government pays us back the bonds and our balance sheet shrinks. That's our base case. Stuff can happen and we'd need to change, but that's our base case.

Wayne Cole: If you hold to maturity, that means you may face a paper loss on the bonds you're holding, given the move in yields, but you won't realise that loss.

Philip Lowe: Well, it really depends upon how quickly the cash rate goes up, really, the interest rate we pay on exchange settlement balances, because we're buying these bonds and we're earning yields between 10 basis points and maybe 1.8 per cent. So that's the running yield we're earning on those assets and we'll earn that yield all the way down to maturity.

At the moment, on the offsetting liabilities, we are paying zero, because that's the rate on exchange settlement balances, so the running yield on these investments, if you think of it that way, is positive and will continue to be positive while ever the interest rate we pay on exchange settlement balances is less than the yield at purchase.

Over time, if we are successful, then the cash rate will have to rise, and the rate we pay on exchange settlement balances will rise as well, and then there'll be running losses, but we'll need to offset those against the running profits we're making at the moment. So we've thought a lot about this in terms of our capital framework, and, if you had an opportunity to read the Reserve Bank's Annual Report, we outlined our approach to capital there and we'll continue to be very transparent about what we're doing.

Wayne Cole: Thank you.

Moderator: This brings us to the end of the session, so I wanted to say thank you to everybody for attending, and we look forward to seeing you next time. Thanks everybody.

Philip Lowe: Thank you very much. Bye.