Transcript of Question & Answer Session The RBA and the Australian Economy

Philip, thank you. You've taken us on a bit of a jaunt around the overall economy, how Australia sits in relation to international factors, you've looked at housing, you've looked at inflation and the labour market, and lots of other things. Now, I've got a list of questions here, and I know that there'll be others who desperately want to ask you questions but let me just ask one. I wanted to just acknowledge that CPA Australia has recently released its own survey of business and economic sentiment. And so we're hearing from our members and businesses about such things that you've talked about; the labour shortage and concerns that that will actually hamper economic recovery.

And given that you've touched on that, I thought I might just touch on another point, which is, do you see that there are concerns arising from – I might put the word capricious in front of – some of the lockdowns and things that impact both business and the ability for organisations to attract labour, even with technology supporting flexibility. Do you see things like uncertainty because of the issues of Omicron and how that will fit with the Delta variant impacting business and therefore making the recovery more difficult, which will impact, obviously, on all of our colleagues here in the room today?

Well, I think the Omicron variant is obviously a source of uncertainty but I think most businesses are looking to a more optimistic future. Now, as I said, in my remarks, we've got a very extensive business liaison program and what we hear from businesses at the moment is that they've delayed investment and they want to start investing again. And we are starting to see some of that in the hard data. And what we hear from businesses is that they want to hire workers. So the predominant message we're getting is that people want to get on with business and as long as we don't have major lockdowns, again, I think they'll have enough confidence to proceed. Their balance sheets are in good shape. People are getting jobs. I'm confident about the future provided that we don't have another major lockdown to deal with the virus. That would set us back again. But if we don't have those lockdowns, I think we can go forward and grow with confidence.

Thank you. Now I've got Michelle Caruso, the NSW General Manager to take any questions from the floor. So I'll take a few questions from the floor and then see if there are any from the media. So questions that anybody else would like to ask?

Thank you, Dr Philip, for coming here today. I've got a question for the future. With the federal election pending and some political pundits tipping a hung parliament – Michael would probably disagree with me on that. What effect do you think that'll have with your role and what effect will that have for the economy going forward?

I think the answer to that is very little, if anything. I mean, the Reserve Bank does its job independent of politics, so the elections don't really affect us at all. In some situations, the election can lead to uncertainty, which can lead to people kind of delaying spending, but the effect there is pretty minor. When we look back through history, there's not very much evidence that the uncertainties associated with an election slows the economy for anything other than a very short period of time. So I'm not expecting the election to have any effect on the economic momentum.

Your tenure at seven years. How are you hoping to leave the balance sheet in the next three years? Have you got your own personal KPI where you'd like to see that on your last days, Governor?

No, not really. It'll be bigger than it is today because we've got kind of more bonds to buy. An issue that we will have to confront next year and the year beyond that is what to do with the bonds that are maturing because we buy these bonds, then they mature. So at our meeting next year, we will consider how we deal with the proceeds of those maturities. We could reinvest them in government bonds, or we could just have our balance sheet shrink. So that's something that we'll turn our mind to next year. I think the other factor that's influencing the size of our balance sheet is the demand for those banknotes. There's $100 billion out there in banknotes, so that's grown 5, 6 or 7 per cent a year even though we're not using these banknotes for transactions – most of us are using cards or our phones to make payments – but it continues to astound me that the demand for those banknotes keeps growing.

And longer-term, the issue is whether we move to a payment system which is based on tokens sitting in our digital wallets. I spoke last week at a speech in Sydney about the various possibilities. Those tokens could be backed by the central bank, they could be backed by a private bank or in some parallel universe, I think they could be just, kind of, a different currency completely, but I don't think that's likely going to happen. But it's quite possible we could end up in a world where the Reserve Bank is backing digital tokens in digital wallets, which would mean a bigger balance sheet again. So there are a lot of moving parts there and the short answer to your question, I don't have a KPI about the size of my balance sheet. My main KPI is to deliver you an average rate of inflation of 2.5 per cent, and I'm falling short on that and we want to do what we can to get there.

And presumably also remain independent of the whole political system in pursuing that overarching goal.

I don't have any concerns about that at all. You know, I've been at the Reserve Bank since 1979 when I finished high school. So I've been there a lot of years, and right through those years, I've never seen any political interference in the Reserve Bank. The politicians are very respectful of the Reserve Bank. They do not interfere – Michael can verify that – and we go do our job. We take our decisions independently in the public interest. So I don't have any concerns about that at all. It's a credit to the Australian political system that they let the central bank do its job in the public interest. It's really a credit to the politicians of both sides that they let that happen.

I've got a question, sort of wanting your take on it. As we, sort of, go into the business planning for our small and medium enterprises in 2022, a lot of, I guess, the boards that I'm working with are looking at trying to obviously restrict the wage growth and offer remote working and a lot more flexibility and they've had to adapt as businesses. What's the Reserve Bank's take on this? Obviously you want wage growth to increase. But I guess the pressure that we're seeing is probably going to be coming up with strategies to try and keep that as low as possible. Have you got any, I guess … what's your take on how the Reserve Bank is going to tackle some of those challenges from the small business and the medium enterprises?

Well, let me describe my central bank nirvana to you. It's an inflation rate that's averaging 2.5 per cent. Labour productivity growth of 1.5 per cent, so that's generating growth in real wages, which is really important for our living standards. And wages growing at 4 per cent. And full employment. So 2.5 per cent wages growth, strong labour productivity growth, strong growth in real wages, and nominal wages growing at 4 per cent and full employment. That's where I would like to see us get to. Whether we can get there I don't know, but stronger growth in wages than we have had over the past decade, I think is in the national interest, underpinned by productivity growth. So I want to see your businesses be incredibly productive and be able to pay wage increases north of 3 per cent and be willing to do that because they're becoming more productive. Whether we get to that nirvana, I don't know, but I think there's a chance and with the right government policies generating productivity growth and businesses who are prepared to invest and be innovative, I think we can do that.

And I have to put in a plug for this profession. So whether it is public practitioners advising their clients or those working in businesses, owning businesses, CFOs, but also in academia and not for profits, they've all got a role in terms of that productivity and efficiency and how, when you think about the digitalisation of businesses and all that this profession can help with, we really do have an important role.

And this is kind of where training is really important.

Absolutely.

You know, when I entered the labour market, the labour market was quite tight. And what firms did was spend a lot of resources attracting and training people. And I think that drives productivity growth and it will help deal with some of the skill shortages and drive productivity growth. So at the moment, I've been talking quite a lot to people about the importance of reinvesting in training, skills development, in technical skills. I think it's a job for both business and for government to support that.

And we've got another question.

Thank you for presentation today. Back to your digital token idea. I just want to understand the idea behind it. Is it supposed to be an investment asset that's competing with modern cryptocurrency or a replacement to banknotes or a mix of both?

I think it's largely a replacement to banknotes. I mean, I don't know whether we'll end up here, but you can imagine a world in which there are Australian dollar tokens that sit in your digital wallet and then people bump their phones together and the tokens move. So whether the technology can be developed on a commercial scale and we can deal with all the security issues. Because if you just think kind of broadly back through kind of the history of mankind, the nature of money has changed a lot. People used to use clamshells and then the colony of NSW, they used rum for a while, didn't they? And then we used kind of paper. Now you have these kind of fantastic polymer notes, and I think it's quite possible again, at some time in the next decade, we say: 'Look, why are we passing around pieces of plastic? Can't we pass around the electronic tokens?' And I think they would still be in Australian dollars and the private market could deliver those, kind of a form of stablecoin.

Another lesson from history is not that just money evolves, but private money often ends in disaster. You know, it's good for a while, but when something happens and confidence is shaken, people really want money that's backed by the central bank and ultimately by the government, don't they? So that's in the back of our mind as well. So it's quite possible we end in a world where these tokens issued by the private banks and backed by the central bank, and we are working through the possibilities of that now. So it's a really exciting area that brings together technology and public policy.

Thanks very much for being here today. Back to, I suppose, the challenge of improving education and training. Is this going to be an issue for governments considering that in the past international students have been, I suppose, largely funding, especially the tertiary sector.

I don't know whether it's a challenge for government. I think it's a challenge for business as well, because a lot of training takes place in the workplace, doesn't it? A lot of us learn by doing, observing our colleagues and this is at the Reserve Bank why I'm very keen for the staff to come back at least together physically half the time, because I think we're stronger as a team and we learn more by coming together. So no doubt there are issues in the university sector that need addressing, but I think it's a mistake to think that it's up to government really just to do all the training.

Businesses have to do the training as well. I think for the last two decades with the labour market not being that tight and being able to tap the international labour market, there hasn't been the same pressure on businesses to train people as there was when I entered the labour force. And I think if the unemployment rate is going to get back to where we were in the early 70s, businesses are going to have to step up as well. Not to say there's not issues in the education sector, but it's a combined responsibility.

Yeah, I would agree. Absolutely. I think there was a question.

Just a question from one of my colleagues. If the bond-buying program does wrap up in May, what does that say about the likely timing of the first interest rate rise?

It says nothing about it. We view these two decisions as completely separable. I mean, they're obviously both linked in a way that they're both responding to the state of the economy, but the bond purchase program can stop either in February or May, and it has no implications at all for the timing of the next … or I shouldn't say the next … of an increase in interest rates. The decision about interest rates is really going to be determined by how we are going on this objective of getting inflation sustainably between 2 and 3 per cent. We are not even to 2, we're at 2.1 per cent at the moment – the first time in six years, we've been inside our target range – so we're still not at the point where we can confidently say that inflation's going to be sustained between 2 and 3.

And I think for us to conclude that wages growth will probably have to be 3 per cent. It's possible we could have inflation of 2.5 per cent and wages growth starting with a 2, but that would be implying the productivity growth was very weak, so I really hope that doesn't happen, but it is possible. I think it's going to be some time before wage growth has a three in front of it at the aggregate level and inflation sustainably at 2.5 per cent. So we can finish the bond purchase program and it has no implications for the timing of interest rates. That's the basic point.

Thank you. And I think one last question.

In terms of the options you set out for monetary policy, if option three did kind of play out and we had lockdowns that affected productivity, and we had to keep monetary policy fairly loose, how do you see sort of the divergence from the rest of the world, if say New Zealand and America, Canada, the European Union are moving towards tighter monetary policy at the same time we're keeping fairly loose with large bond purchases? Do you see any problems? Or what sort of complications do you see from that potential outcome?

I don't see any problems, but if everyone else is stopping bond purchases or even tightening monetary policy and we're not, the main effect on the Australian economy would be a lower exchange rate. This is one of the reasons why we started purchasing the bonds – because everyone else was doing it and if we didn't do it, our interest rates, our bond yields would go up and the exchange rate would go up, and given we were looking over the abyss, we didn't think that was sensible. So we were very much influenced by the actions of other central banks, the margin. If they stop doing this, then it increases the probability that we will stop as well. But if we think it's the right thing to do, keep going, we will, and the main effect would be an effect on the exchange rate.

Look, unfortunately, that is going to draw us to a close, but I'm going to take the opportunity to just reflect on behalf of all our local members here. It's fabulous when a local person, and in this case, a boy from the bush has grown up to have such a stellar career. And I'm sure the folk here in this glorious day would be interested, Philip, to hear if there are any fond memories you have of growing up in the region that you'd be willing to share with us.

Well, I have a lot of fond memories, as I said at the start, of coming to this park and it had a fantastic kind of a playground over there. My mother would, I'm one of five, so we'd come here and we'd kind of muck up in this park. You could get lost, wouldn't have to be with the parents because there was a zoo over there as well. So that was kind of fantastic. And as a child, I played a lot of golf out at the Wagga Wagga Country Club, so I have very fond memories of that and my time at Trinity and St Michael's was fantastic. So I feel, kind of, incredibly privileged. When I was here my parents used to say, well, make sure you work hard, be nice to people and have a positive attitude. I think they're kind of country attributes, aren't they? Hard work, be nice to people and have a positive attitude.

They're kind of universal values, but I feel like they're particularly country values and I've tried to carry those through with my life. Work hard, be nice to people. As my mother used to say, if you can't say something nice, don't say anything at all. So I tried to do that and you know, keep a positive attitude. And I think this country is fantastic, we're the luckiest people in the world to live here. And you know, you look at places like this, it's just kind of fantastic and we've got a fantastic future ahead of us and we've just got to seize it.

Well as a girl who grew up in the country, I must say, I grew up with very similar values. It certainly resonates with me as I'm sure it does with everybody else in the room. So on behalf of CPA Australia and all our members and particularly those here today, thank you so much for your fascinating presentation and the breadth and depth of the topics you've covered in such a brief period of time is extraordinary and obviously a testament to your incredible ability and we thank you so very much, Philip.

Thank you very much.