Transcript of Question & Answer Session Appearance at the Walkley Awards for Business Journalism 2021

Ticky Fullerton

Governor, thank you very much indeed for those words about our relationship and also for coming to the lion's den and talking to first, me and then to everyone and taking questions with no limits. So we're very grateful for that. Now, one of the issues is of course, the people in this room and indeed economists and analysts, they hang on every single thing you say, every hint of a nuance of a tiny thing matters a lot. Now, the Federal Reserve of has a very different setup. There's a lot more transparency. And I just wonder whether, if you think about the members of the FMC, their ability to talk around the subject of interest rates in particular, and also their dot plots, whether particularly as we look like we're going to have a review, whether you would welcome more transparency and that sort of transparency?

Philip Lowe

Well, it's clear that different setups can work. The Federal Reserve has that arrangement and other central banks have something similar. Our central bank is unusual in the fact that the people who made decisions are not spending their entire life sitting in the central bank. The members of Federal Reserve are full-time employees of the Federal Reserve and branches, The Bank of England, most of the people there taking decisions, are there all the time, the same as the Bank of Canada. So our Board is different in that the Board members come in for a meeting once a month. They're not full-time central bank employees. So that means the nature of decision processes are different. I think if you were to go down the route of every single Board member, putting their forecast into the public domain through the dot plots, then you would need a different type of Board.

I personally think the type of Board we have is serving the country very well. People sometimes talk about the lack of diversity in the central bank. We have more diversity in our Board, the people who actually make the decisions, than other central banks, basically because they work in the central bank all the time, most of them, they are economists who will have some training in that way. Whereas the people who make decisions about interest rates in Australia come from very diverse perspectives. So, I think there's a lot of benefit in that. But if the government wanted a different setup for the Reserve Bank Board, clearly different setups from what I've done, I've agitated that, because I see that the benefits, the diversity perspectives that we get and the non-economists are very good at balancing risk.

Ticky Fullerton

Some might argue that the diversity is not enough, particularly given the very different issues; you've just lost your deputy to one of them, the issue of carbon emissions. So what do you think about perhaps the idea of having different sort of stakeholders on the Board, including bringing back the idea of a union representative or someone who represents other stakeholders as the society is changing.

Philip Lowe

Well, that again is ultimately a matter for the government, who they appoint to the Board. The Treasurer makes the decisions, so it's his or her decision to appoint to the board. And I push back against the idea that people are there to represent constituencies. Now, each of the nine people on the Board, we talk about this, our job is to represent all Australians, to do what we can to maximise our collective welfare. So people aren't there to represent – if you're from Western Australia, you're not there to represent the people of Western Australia and their mining interests, we're there to represent the 25 million people.

Ticky Fullerton

And we know very little about what goes on at the Board table in terms of your deliberations. Do you think it is a better Board that openly disagrees and you have banter and disagreement, or do you think furious agreement is a better way to go? You talked about the importance in the town square of having different views. Do you think it's important for Board members to come at this with different views?

Philip Lowe

Of course, and that's exactly what happens. You know, as I said, I see shades of grey everywhere. Sometimes I have two views in my mind at the same time. Then we discuss at these meetings all the arguments for doing this and that, and the arguments on the other side and I often present them, or my staff, present them, or one of the other Board members will present them. So the idea that we kind of just go along and I say, ‘Interest rates aren't changing,’ they say, ‘Yes. Yes, let's go to lunch.’ That's completely fanciful. I say, ‘Well, we could do this, but the argument for doing this would be that.’ And they say, ‘Yes, but how about this one?’ So I wouldn't say it's disagreement, it's collective exploration and that's the way that I like to do things. By nature, I like to find the consensus that I need to explore through the shades of the murky wall of grey I live in, and that's what we do.

Ticky Fullerton

Now since we last spoke, which actually wasn't very long ago, we've had a move by the Fed to raise rates. We've had announcements by the government around their budget, that there will be a cost-of-living cash splash and there are growing concerns, even at supermarkets now of talking about food prices higher for longer. We've of course got oil prices and the bowser to think about. These are a number of forces, all pushing in one direction on inflation. What is it going to take for ‘plausible’ to become ‘likely’ in terms of a rate rise this year?

Philip Lowe

I didn't really want to talk about monetary policy, and made the important point about equal access to information. But I think that there are two, as we talked about a couple of weeks ago, there are two issues that are really on our mind at the moment. The first is how persistent the supply side problems are. How long are they going to keep pushing up prices? And at what point will some of those price increases be reversed? Because it's quite possible that these big price increases occur, that they're not repeated, the prices normalise and that after a spike, inflation comes back down again. So the question is, how long are these supply side pressures going to last? And that's unknowable.

And the second is, what's going on in the labour market. Because it's quite possible to have a spike in inflation that goes up because there's supply side problems, but then it comes back down. But it will only do that if labour costs don't respond too much. So at the moment, aggregate wage growth is 2½ per cent, which is where it was before the pandemic and that was delivering inflation consistently year after year below 2 per cent. Some of you are criticising the Board for that. So that's where wage growth is. So when we're looking to see what happens to aggregate wage growth. And here the critical question, and again, this is unknowable is, is the inflation psychology in the country shifting?

Ticky Fullerton

Are you going to be forced though, to push up rates before you get to full unemployment because of these pressures?

Philip Lowe

No, we're never forced, I'm never forced. I don't feel like this pressure. We'll do what we think is right for the welfare of the 25 million Australians. So that's our decision making, we never feel like we're forced or we have to do anything. The question that we're grappling with is ‘is the inflation psychology shifting?’. As in the past decade, it was pretty unusual to see a business person go out in public and say, ‘We're putting up our prices.’ In fact, they were kind of embarrassed about putting up their prices, weren't they? When I had asked why they were only giving wage increases of 2 they'd say, ‘Well, it's very competitive out there. I can't put my prices up therefore I can't put wages up.’ So that was the psychology that's been pervasive for 10 years. Is that changing now? It could be. I've seen the head of Wesfarmers, and I think the head of Woolworth's too, say ‘We're putting up prices.’ They'd rather not be saying that, but they're no longer embarrassed about doing it because …

Ticky Fullerton

So the psychology is changing?

Philip Lowe

There is a shift going on, but how pervasive is it? Other business people we talk to again say things are super, super competitive out there. Our costs are going up, but we really can't put our prices up that much because we don't want to lose market share and other people aren't putting their prices up. So some are, and the psychology is shifting. I think the other psychology that we're looking at here is in the labour market. At the moment, workers are not getting bigger pay increases because inflation's low. Will that be the case in six months' time? I don't know. We're starting to see stories in the newspaper about workers demanding 6 per cent pay rises for higher inflation and some inflation-linked enterprise agreements as well. So there's something going on there and how pervasive it is, we don't know yet and until we see the evidence, we're not going to respond to it.

And I think the other, sorry, just one point I wanted to make was we're prepared to, and I said this a couple weeks ago, we've been prepared to let this run for a while longer than many other people would've wanted us to, because we want to lock in low unemployment. There's a huge benefit to the country of having people in jobs. It gives them opportunity and improves the community they're living in, so while ever we can, we'll keep interest rates very stimulatory to get people back into jobs and how long we can do that for? I'm not sure, but that's a priority at the moment.

Ticky Fullerton

Okay. So you're going to stick with the criticism of being behind the curve in order to get this unemployment to a level where you want it to be?

Philip Lowe

Whatever we do, I'm going to be criticised. I know that. We pay attention to what people are saying but the criticism and the pressure that people think we're under, just doesn't resonate. We go through these issues analytically. What are the supply-side problems doing? What's the labour market going to do and is the inflation psychology shifting? And we discuss this in a kind of cold analytical way, and make our decisions.

Ticky Fullerton

Well, look, the Governor has very kindly agreed to take questions from everybody and we've got until 1:50, which is a reasonable amount of time. So I'm really happy to hand it around and I probably think it's probably fairest to literally, I think we've got the time to do it, to sort of go around from one side to the other so that everyone has a chance to ask a question. If I need to speed it up, I will. But shall we try it like that?

Max Mason, AFR

I was wondering what the RBA itself is going to do with the competitive labour market given you've obviously lost an employee last week, week before, so I'm interested to hear what the RBA is doing in terms of retaining those people.

Philip Lowe

That's a good question. I think the Deputy Governor, well, I know the Deputy Governor didn't resign because of wage pressures. He was well paid at the Reserve Bank, and I'm sure he is well paid in his new job. But he thought he could make a contribution to the welfare of the Australian people through green hydrogen and I'm sure he'll do a fantastic job there.

But the more substantive response is, it's hard keeping workers at the moment. Our Board has set about to get back to full employment, and that makes it hard for employers like ours. We're operating under a wage cap effectively, imposed by the Federal government. The current wage increase at the Reserve Bank was 1.9 per cent. So, that's pretty tough. The biggest department of the Reserve Bank is the technology department. There's the transaction bank, the government want us to operate the settlement system – their technology businesses, so we're finding it increasingly difficult to attract and retain staff.

One of the things that I do when I'm talking to staff, is talking about the fact, if you work at the Reserve Bank you're part something bigger than yourself, and that's attractive to many people. You mightn't be paid as well as you would be in the public sector, but you're part of something bigger than yourself. You're contributing to the welfare of the 25 million people who are lucky to live here, so that resonates with people.

We're providing more flexible work arrangements than we have in the past and we've got a very collaborative team-based culture. So I emphasise that as well. But if people are purely motivated by money, they're probably going to go elsewhere. But if they're motivated by having interesting work, working within a team-based culture and doing something for society, it's a very attractive place to work.

Ticky Fullerton

Feel free to pass. I've just done the numbers it might be quite tough for time, so Peter …

Peter Ryan, ABC

Peter Ryan from the ABC. Thanks for the question. As Ticky mentioned, we'd all love to see dissenting opinions from the RBA Board, but I was wondering if you might be able to provide a bit of colour, even a bit of an exclusive, I guess, on what goes on inside the RBA Board? Do you ever actually have to deal with dissenting opinions or do tempers fray, or do you actually see any split between those members of the Board?

Philip Lowe

Tempers don't fray. I've put a lot of emphasis on the collegiate nature of our discussions and navigating our way through this world of grey and the other Board members do as well. It's very rare for people to have black and white views. We discuss issues and people can share their perspective on each of the issues. So it's not as dramatic as you might like it to be. There's a collaborative process and we're exploring our way through. The other point I can make here is it's a repeated process. We meet 11 times a year. So it's not like I come to a Board meeting and make a recommendation that we probably haven't discussed the previous meeting. So it's a collective process, it's iterative. I pretty much understand people's perspectives and they understand mine and we discuss the issues each time.

Ricardo Gonçalves, SBS

G'day Governor, Ricardo from SBS. You spoke earlier about the diversity of the RBA Board. What do you mean by diversity of the Board? And do you see a time potentially where there may be a female governor of the Reserve Bank or more diversity in terms of economists coming up through the ranks? Whether they come up through lower socioeconomic parts of the community, for example.

Philip Lowe

In terms of the Governor of the Bank, I would hope to see that there would be a woman at some point. And I noticed both the Treasurer and the Shadow Treasurer said they'd like to see a woman appointed as the Deputy Governor, and I share that view as well, so we'll have to see what happens.

In terms of the diversity of the Board. The point I was inferring is it's not all just economists. So some people think, ‘Well, wouldn't it be great if the Reserve Bank Board was made up of just economists.’ My perspective is you've got to have a balance. You've got to have a balance of people who know a lot about economics, but also understand public policy making and understand decision making under uncertainty, and who are good at exploring their way through this grey world we live in. So, that's the diversity I value.

In terms of the diversity of the staff. We've done a lot of work over recent years on who's studying economics in high school. And a number of years ago, I'd been concerned when one of my kids was studying economics at year 12, looking at the student cohort across New South Wales and I noticed that, for every girl studying economics at high school, there two boys. Well, how could that be? Economics is gender neutral. So why was that? And then when we looked further into it, because it's primarily boys in private high schools in Sydney and Melbourne. So the economics base that the country is drawing on, at least from the high school perspective has shrunken. The number of kids studying economics in high school is much less than it used to be. It's primarily boys and boys in private schools.

So we are spending a lot of time with the educators, particularly in girls' schools and in schools that aren't as privileged as the private schools in Sydney's North Shore and Eastern suburbs. But it's hard work to get girls from a whole range of socioeconomic background to study economics. So whatever you can do, whatever anyone in this room can do, if you'd like to partner us in helping explain how this is a great thing for girls right across Australia to study.

Ross Greenwood, Sky News

Ross Greenwood from Sky News. In your aspiration for full employment, I wonder whether in the long term that creates something of another pressure, and that is the government collects half of its money, revenue, each year from PAYE taxpayers. It also has a capped tax GDP of 26.9 per cent. Beyond that, it starts to give out tax cuts or tax concessions at some stage. I just wonder, given the fact that the lower the employment rate goes the more money the government makes from PAYE tax payers. The more prospect there is of the government handing out that tax, potentially at the very same time that the Reserve Bank is seeking to tighten monetary policy. I just want you to go over that scenario in your world of grey, that you may very well have the government loosening policy at the same time that the central bank is tightening monetary policy.

Philip Lowe

I don't really want to comment on that because we're close to an election. I don't want to talk about the government's fiscal strategy. But it must be unambiguously good if people are getting jobs and paying taxes. That's how we're going to repair the budget and there's a lot of demand on the budget as you know. The costs of aged care, of disability, and defence. Those costs are all rising as a share of GDP, so we need to pay for them. Don't we? So how are we going to pay for them? So people getting jobs, getting higher real wages, it's the best way to pay for them.

I'm not particularly concerned about some conflict between monetary policy and fiscal policy. The last couple of years, the Reserve Bank and the government have worked very closely together to address the problems the country faces and I'm not concerned about conflict going forward.

Angus Grigg, ABC

Angus Grigg from Four Corners. Can you tell us how the Reserve Bank thinks about climate change and where you see the threats in the longer term and how you consider those? But also, maybe the opportunities for Australia around producing rare earths or lithium or copper or cobalt, things like that.

Philip Lowe

I'm not close enough to identify all the opportunities. It's a pity Guy wasn't here, because he could do that and he could talk for half an hour about green hydrogen. And he would always say that Australia has tremendous opportunities. Many people have made this point, given the sunshine, the wind, the land, our scientists, the technology and our ability to get things done. So we've got tremendous opportunities here. So we would always talk about the opportunities rather than the risks.

From the Reserve Bank's perspective, the main issues I think are on the financial side. These longer-term opportunities for the country are fantastic, but we can't do anything about that. The main issue that we talk about at the Council of Financial Regulators, which I chair, is the importance of information and disclosure. Because capital markets are fantastic at solving problems. They allocate resources to where they're most efficiently used. They don't always get it right, but pretty much they get it right most of the time. For them to do that, they've got to have information. And the two pieces of information that we've been focused on recently are the common vulnerability assessments that APRA is doing. So hopefully that focuses financial institutions' minds on measuring and managing client risk and putting out in the public domain.

And the other, which is a global effort, is climate disclosures by all corporates so that investors can make decisions. There's work that we're a part of with ASIC and internationally about a standard disclosure template. And there's a discussion here about whether that should be mandatory. I think probably in time it will be mandatory just like the accounting standards are mandatory. We're not there yet, but I think that will happen over time. So it's getting any information out there so that the capital markets can play their role.

Ticky Fullerton

Next question.

Jonathan Shapiro, AFR

Hi. Thanks Governor. Jonathan Shapiro from the Financial Review. My question is about foreign currency reserves. In the last few weeks, we've seen quite unprecedented steps in terms of sanctions for these foreign currency assets of Russia. I'm interested in your perspective as a central bank Governor. On this act, or I guess, on this step of freezing foreign currency assets, I'm interested in your perspective, mindful of the fact that, perhaps at some stage Russia may have owned Australian dollar assets. I think when the currency was very high, or when the interest rates were higher, there was a lot interest in Australian dollar debt from central banks. And then as well as the central bank that invests in foreign currency reserves, just interested in this unprecedented move. And whether you think looking into the future, this will have an effect on where central banks put their money?

Philip Lowe

I don't think it'll have any effect for the mainstream Western central banks and what we've seen is something that nobody thought would happen. It's so egregious what Russia has done. I think it's appropriate that their foreign reserves get frozen. We're back into a world now where there's war in Europe, and people having their homes bombed by a fellow G20 country, It's so egregious that I think no sanction is too much. So, I think it's perfectly appropriate.

Will it change behaviour? I don't think so, but governments who are prone to misbehaving might think twice about where they invest their money. So, we could well see an increased demand for gold, or maybe even some of these cryptocurrencies, heavens above. It's possible, isn't it? That states that maybe have some bad intentions in the back of their brain somewhere think they would do something different with their money. For the mainstream central banks, it's not an issue. We're not worried about our reserves being frozen. But it could change in gold and crypto, people are talking about possibilities there.

David Ross, The Australian

G'day Governor, it's David Ross from The Australian newspaper. Sorry to see Guy Debelle move on, but in terms of your role, do you take a view as to how long you might like to be at the RBA? Is there any major employer out there who can tempt you away?

Philip Lowe

There is no employer that could tempt me away. My term finishes in September next year. I think you asked me this question a week and a half ago, and my answer is the same. I'll do whatever I'm asked to do. It's a privilege to have the job that I have. I enjoy it, it's a dream job for someone who's interested in economics, and public policy, and the Reserve Bank's a fantastic place to work. I enjoy what I do, but I perfectly understand if some time next year the government would decide it'd be better if somebody else had the opportunity that I have, then that would be perfectly fine with me. If they ask me to stay on, that would be perfectly fine as well. I'll do whatever I'm asked to do.

Michael Janda, ABC

Michael Janda from the ABC. You've spoken a few times about wages inertia, and the unique features of Australia's enterprise system, such as enterprise bargaining, that mean inflation is slower to pass through into wage increases. But obviously, inertia works both ways, once wages start increasing, they'll also presumably take longer to come back down once inflation drops off. So, what's your point of view around that? The risk of extended wage increases locked into enterprise agreements?

Philip Lowe

I think that's pretty unlikely. I'd like to see some bigger wage increases. I'm not worried that they're going to be locked in. We've got maybe 20 per cent of the workforce who are employed on three-year enterprise agreements, so those ones turn over fairly slowly. It'll be very interesting to see the National Award case at the end of the year. The last increase there was 2½ per cent. It'll probably be higher, but I don't imagine it's going to be massively higher.

And, state governments, and the Federal government, employ roughly a third of the workforce, and I think in Victoria, still the biggest wage increase that you can get in the public sector is 1½ per cent, in New South Wales it's 2½. So, again, I imagine those numbers are going to increase, but again, are state governments who keep on saying they're under budgetary pressure, going to give 4 and 5 per cent wage increases? I don't think so.

But if it did happen, then we'd have to think about it. But I think there's enough inertia in the system, and it's quite possible that these supply side problems get resolved, and when they start getting resolved, prices start declining, and this spike in inflation that we've got gets reversed and comes back down to 2–3 per cent. It's quite plausible that that happens.

Ticky Fullerton

There's that word again. Now, what about our Walkley winner, yes.

Caitlyn Rintoul, The West Australian

We all know that over the pandemic, people are taking different approaches to work. There's a lot of people who are working online, there's an e-commerce boom. You mentioned crypto. I personally know of a dentist who has quit his job to trade crypto. How does this play with the Reserve Bank? And, is there any concerns around data collection when it comes to this diverse avenue of work?

Philip Lowe

Sorry, in terms of …

Caitlyn Rintoul

People working online, people working differently, and not necessarily taking up those standard nine to five jobs.

Philip Lowe

Well, there's certainly been a huge change lately. I think, at one point, there was only 5 per cent of our staff in the building in Martin Place, with 95 per cent were working from home. So, like everybody, we had to adjust, and there were many days I'd go into the office, because I like working from the office, my office is better than my home workspace. I'd see the guards at the front of the building, guarding your money down in the basement. So, it's the guards, the money, and me.

But, I'm very keen for people to come back, at the moment at least, half their working hours spent together, because I think you build relationships and, if you have relationships, you can discuss ideas more effectively. Whether it's ideas about monetary policy, or how to provide better banking services to the government. So, maybe this is just me, but I feel like, in the 2½ years of Zoom meetings, I didn't deepen one single relationship. I certainly met some people but, did I deepen a relationship. I don't think so, if I'm honest and, by nature, I'm an introvert. So, I can only imagine how hard it would be for extroverts. So, I'm very keen for people to come into the Bank, at least half their time, to build relationships so that they can debate issues, and discuss issues, and improve our services.

Not everyone wants to come in, so this is one of the things in a tight labour market, you've got to have flexibility, for some people can do their job from home for a period of time, it's a different world. But in the end, I want people to be with their colleagues.

Ticky Fullerton

Next question.

Michael Roddan, AFR

Michael Roddan, Financial Review. Back to this RBA review that is probably going to happen. You said before that you've been working very closely with the government over the last couple of years, and you're on a good page there. Prior to that period when there seemed to be rising unemployment, house prices falling, you made a lot of public comments about how the government could probably do more in fiscal policy, productivity, reform, infrastructure spending, and things like that. And, Josh Frydenberg brought you into his office and gave you a presentation about how bitumen prices were too high to do a lot of infrastructure.

With the RBA review, do you think that … maybe this a statement more than a question – but people might not understand what they want the RBA to be doing when people are saying that they should cut rates earlier, prior to COVID, then they wouldn't have had the 2½ per cent there to use, or to play with, at that point. Do you understand what the grievances are with the RBA, and the people who are calling for that review? Because, sometimes I struggle to understand what they want.

Philip Lowe

What do they want? I don't think there's a single thing they want. Inflation was below the 2–3 per cent band for a few years and people look at that, and say, well, that was your target, therefore you've failed, and because you've failed, there's something wrong with you, and you must be reviewed. Now, that's the kind of logic, and I can understand that.

So, a review, which I welcome, would give us an opportunity to explain the context of those decisions. I hope that one of the things that could come out of this is that we could move to something a bit more like the Canadian system. They have a systematic review that's agreed by the government and the central bank once every five years. And, it's depoliticised, it's kind of technical, and the government, through the Canadian Treasury, and the central bank work on a recommitment.

And so I think, if we could over time move to something like that, it would help depoliticise this, and make sure that there's a structured review process that's periodic, not too frequently, but periodic. So, these issues could be on the public record, and I hope something like that could come out of this.

Ticky Fullerton

Okay. Who's next?

Swati Pandey, Bloomberg News

This is Swati from Bloomberg News. I wanted to ask if you see a risk of stagflation from the Russia-Ukraine war, given the price of everything's going up?

Philip Lowe

I don't know whether you were here when I was talking about the grey world I live in. There's lots of possibilities, and there's a scenario where that happens, but I think it's quite an unlikely scenario that we get stuck in a world of persistently high inflation. A lot of prices are going up at the moment, and that drives inflation up. But, let's say oil stays at $100 or $110 a barrel, in that it stays at that level, and the inflation rate is zero. And, maybe it even comes back down to $90, let's say, then you get negative inflation.

So, for us to be in a world where inflation stays high, you've got to have these prices keep going up at the rate they've gone up in the past year. It's pretty unlikely, isn't it? Or, wages growth picks up, and is much higher, and sustained at a higher rate. I think, for the various reasons that have affected labour market outcomes for more than a decade, those factors are still there, and, again, will reassert themselves at some point. They probably will. We can't rule out a scenario where we get stuck with much higher rates of inflation, but I think it's pretty unlikely given the way that central banks operate, and the way that labour markets globally are operating.

Amber Plum, The Australian

Amber Plum from The Australian, and thanks for your time with us today. With inflation, one of the big pull throughs that we're seeing at the moment is the effect of the oil price, from what's happening overseas. And, you obviously have done a lot of modelling around that and the different scenarios.

I was just wondering, as part of that modelling, whether you've looked at any particular metrics around what Australian consumers are able to afford at the hip pocket level, and if you've taken that type of thinking into your modelling and your various scenarios there, so it's a bit of a complex question.

Philip Lowe

The inflation rate at the moment, it's 3½ per cent, and probably will be up to 4½ per cent, who knows, depending what happens with the oil prices. And wages are maybe going up, high 2s, let's say 3, and inflation's going up. So, that's a real wage cut of 1½ per cent, this year. So, that will obviously affect people's budgets, but then inflation's not going to stay that high, so it will come back down again. So, we've got one year where there is a decline in real wages, I think that has to be balanced against the nearly $250 billion of extra savings that was done in the last two years.

As the governments did JobKeeper and other programs going to households, a huge amount of money supplemented their income, and they couldn't spend, so people saved an extra $250 billion. And that's a huge amount of money counterbalanced against the kind of modest real wage cut this year. It's different households being affected, but as long as inflation comes back down again, I think households will manage through this and, on average, they've got a lot more money in the bank to help them.

Eric Johnson, The Australian

Thanks for that. Eric Johnson with The Australian. Maybe this question can look back rather than forward, so you can get a bit of breathing space, but if you cast your mind about two years ago, around this time, I think it was around about a month or two away that you gave that first press conference, the big, ‘this is what we're doing’ press conference, were you flying by the seat of your pants or … What was the moment, could you just sort of talk through some of the thinking around that?

Philip Lowe

No, I wasn't flying by the seat of my pants, but I do recall that the environment in which we were making those decisions. We were getting advice from the government and this was in the press as well, where tens, maybe hundreds of thousands of Australians could die. There were plans for setting up temporary morgues around the city. The unemployment rate, with people saying, well, it could be 15 maybe 20 per cent. There'd be dips going into the labour market which would last for a generation and who knows whether we're going to get out of this alive. So, that was the public environment, people were scared. They were locked in their homes. And in that environment, we wanted to do everything that we could reasonably do to minimise the risks.

At the time, we recognised that all these measures may not be needed. They might be too much, but that was a risk that we were prepared to run, particularly given the downsides that would obviously emerge if there were temporary morgues around our city and unemployment was going to 50 per cent. So, I didn't want to leave anything on the table in those difficult times. I recognised that some of this would have to be pulled back earlier than we then thought, but that was a risk that was worth taking. And, as things have worked out, the economy's done much, much better than we thought, and we're having to wind these measures back more quickly than I anticipated. And it's caused us some embarrassment, but I'm not embarrassed by trying everything we could back in March 2020. Didn't want to leave anything on the table then, given the possible world that we could be living in.

Paul Bailey, AFR

Paul Bailey from the Financial Review. When you talked before about the amount of spending and the need to pay for it, how prudent or, indeed, necessary do you think it is for governments to plot a course back to surplus?

Philip Lowe

You know, I have to be careful here, but I don't think we need to chart a return back to surplus, but what we need to do is chart a decline in the debt-to-GDP ratio and we can get back to a lower debt-to-GDP ratio by increasing GDP quickly and this is where the productivity agenda is so important. We've borrowed a huge amount of income, so a huge amount of money against future income. We've got to make sure that future income's there and strong. And that's the best way of dealing with the debt situation. So, the productivity agenda, and we've talked a bit about that before, it's kind of about infrastructure, skills development, R&D, taxation, industrial relations. So, those things can give us stronger future income and that's the best way to deal with the debt situation rather than going back to try and run surplus again on lower future income. That wouldn't make sense.

Adele Ferguson, Sydney Morning Herald

Thanks. In the past, the Reserve Bank has talked about a property bubble and warned the banks about investment properties and all that sort of warning. We're now in an environment where responsible lending laws are being relaxed, mortgage broking review, isn't going to happen. Are we getting to a point where the Reserve Bank will come out again and start warning the banks? Or do you think they're more responsible in who they're lending to?

Philip Lowe

Well, they're certainly being more responsible than they were once upon a time, and so they should be. I don't have, at the moment, any concerns that lending standards have been weakened in a way that's prejudicial to the stability of the economy or the financial system. And you could probably always find someone who's got a loan that maybe you think they shouldn't have got a loan, but the very vast bulk of borrowers have been assessed on very reasonable terms. Banks have to apply a 3 per cent interest rate buffer. So if you get a mortgage at, say, 2½ per cent, the banks have to make sure you can pay that back at 5½% and we can tell from the characteristics of the loans that've been made, they're much better than they were a while ago.

Adele Ferguson

So there's no concerns that when interest rates start going up, which … the inflation psychology seems to be popping in, we're going to have a problem on our hands?

Philip Lowe

Well, there are risks everywhere, aren't there, in this world of grey? There are risks everywhere, but at the moment, the median borrower has a buffer of two years interest and principle payments that they're ahead; median borrowers, two years ahead. They can not make a payment for two years and they'd still be on schedule. It's quite remarkable. Back in 2018, the median borrower was only one year ahead. So that's been a very big change and a lot of this $250 billion that's been saved is sitting in people's offset accounts. Other people have more deposits and they've built up money in their offset accounts.

So, the buffers that people have built up are bigger and because of measures that APRA took, banks have to apply this 3% interest rate buffer when they're deciding how much they lend to you. So, as I said 2½, if you're borrowing at 2½, then you have to be able to pay it back at 5½. And you've got all this extra money in your offset account. So that's not to say there aren't going to be problems, especially if interest rates have to go up by a large amount, but the buffers in the system have been built up. That stands us in good stead.

Ben Butler, The Guardian

Thank you. Ben Butler from The Guardian. Well there's no risk of a wages blowout, because we're locked in for 2½% for the next three years. You spoke before about how we haven't … That's the truth. We haven't had wages …

Philip Lowe

You're not alone, if that's any consolation.

Ben Butler

… not much. We haven't had wages growth really in this country since about, I think, 2013. Realistically, it's been pretty much stagnant since then. What, in your mind, are the factors that have caused stagnant, or lack of wages growth in this country over time? What should be done about it? And is there actually anything that you at the Reserve Bank can actually do about those issues?

Philip Lowe

Good questions. Why has wages growth been kind of in 2, 2½% for the better part of a decade? I've often asked business people that question, because before COVID, I'd go to business boardroom lunches and they'd say, well, ‘It's so hard to get workers. People don't have the right skills’ and I'd say, ‘Why don't you pay people more to attract them from a business who has these skilled workers?’ And the answer would be, ‘You've got to understand it's very, very competitive out there. I can't put up the prices of my goods and services. I have to keep my costs under control and, therefore, I can't increase wages. Maybe I can do something for one or two people, a special deal, but I can't increase wages across the board.’

And I think this cost-control mentality was partly borne out of that period with the very high exchange rate during the resources boom. When one Australian dollar was buying you $1.10 US dollar, everyone who came to Australia said, oh my God, this place is so expensive. And it was, and it was hard for businesses, Australian businesses, to compete in the global market. So, this mentality got ingrained in that period that costs in Australia were too high, because, really, the exchange rate was too high, but costs were too high. And that mentality, I think, reduced the willingness of firms to put up both prices and wages.

So there must be other reasons as well. But that was the one that I kept on coming across. What can the Reserve Bank do about it? We can't really do anything about that cost-control mentality, but what we wanted to do is get the unemployment rate down as low as we could to create a tight labour market so that firms, despite their reluctance to pay higher wages, had no choice. Because the labour market was so tight, you had to attract workers and to do that, you would pay a higher wage. So our strategy was to get the unemployment rate down. Firms had to compete, worker's wage increases, would pick up, and inflation would return to target. That was the strategy immediately before COVID, and that remains the strategy. And I think it has a better chance of success than I thought a little while ago. Who would've thought two years into a global pandemic, we'd get the lowest unemployment rate in generations, right?

And inflation, looking at underlying terms, it's 2.6%, so it's in the middle of the target band, and we're close to full employment. So from where I sit, things are actually pretty good. The economy is being remarkably robust, the level of GDP compared to before the pandemic is 3½% above. No other Western country is in that position, almost at full employment, and underlying inflation is at the mid-point of the target range. Sure, there's kind of a blip coming, but you've got to step back sometimes, and it actually isn't too bad in this country. We haven't done that badly.

Ticky Fullerton

That's a very good ending, Governor. Thank you. Thank you, indeed. And I think actually my plan worked, were it not for Adele's follow-up question. And so, that's fine. Please come back up here. But thank you so much for bearing with us all.