Transcript of Question & Answer Session Long and Variable Monetary Policy Lags

Thanks very much, Chris. We’ve got about 10 minutes for questions; a number have come in. But we can get you a microphone, if you want to take the manual approach. Chris, maybe if you see a hand up, you’ll let me know. You’ve got a better view than I have from up there. The first question—

Good morning, Chris. Thanks for the speech. My question is about the coordinated action that central banks took over the weekend, given the backdrop of banking crisis we’re seeing. Is the RBA involved in conversations with other global central banks, in terms of a coordinated action as well; and does that boost the case for a pause in the tightening cycle for the RBA?

We weren’t involved in the swap arrangements that have been announced because we don’t need to be involved in those. But, yes, I am and have been kept informed of these developments over the course of the weekend by my counterparts offshore. As for what all of this implies for interest rates, look, it’s just one of many things that the Board will be taking into account when it makes its decision next month.

Thanks, Chris. The next question I have here is again on the situation of the global banking sector. What seems interesting, from a policy perspective, is the weakness in the global banking sector is being described in terms of the lagging impacts of higher rates. Is this the sort of second-order consequence the RBA is considering, and to what extent can systemic risk factor into policy decisions?

I think it’s important to sort of put this into some perspective. The banking sector is in a much stronger shape globally than it was 10 years or so ago, right? Regulators, markets, banks have made sure they’ve put a lot more capital in place. There are a lot more stringent requirements around liquidity as well. What we’re talking about here are a few institutions that were poorly managed and did not meet those higher standards that have been imposed on almost all banks globally and on Australian banks, so I think that’s important to put in perspective. What’s happening is leading to questions about some confidence in some banks. Noticeably, it’s led to a risk-off move in markets, there are some stresses, extra volatility, and we’re seeing some of that here in Australia. But many of the changes that are happening offshore and focused particularly in the US and in Switzerland as well—many of those changes are much more modest here than they are offshore, as you would expect given the strength of Australian banks. We have good risk management and good balance sheets here, as I said in my speech. So, look, again, the Board here will be taking account of financial conditions, as they do all the time, when making their decisions about what to do on monetary policy.

Thanks, Chris. A couple of technicals here on TFF. Would the RBA contemplate a shorter tenor TFF in a future crisis to mitigate the lag associated with fixed-rate mortgages?

We haven’t done a formal review of the TFF yet, partly because we’re still in the midst of it. I wouldn’t rule anything out, if needed, in terms of unconventional policies. But we have learnt quite a lot of lessons from this time around, and I think we certainly wouldn’t do things exactly the same as before, and it depends very much on the circumstances. But I don’t think that’s particularly relevant for where we’re sitting today.

Sure, okay. The next one on TFF: will the RBA cancel the funds received from the TFF repayments—i.e., shrink the money supply it created—or keep the money in a separate RBA account for future use?

No. It’s automatic; it just rolls off.

Okay, thanks very much. On lagging effects, given the enhanced risk of over- or under-shoot in a period in which rate changes come so thick and fast, is the RBA thinking about new or innovative ways to test the impacts of policy decisions; in other words, are the data available the best we have, or are there additional tools that could help interpret these lagging effects?

We’re always looking for new and more timely data. I can provide just a few examples of those. During the pandemic, the ABS very helpfully generated a lot more-timely indicators of household spending, and they’re particularly useful in things that we focus on, amongst other things. Our liaison, of course, is very extensive. We have officers in every major state capital. They talk to a lot of businesses all the time and many of those also provide us, very helpfully and kindly, with data that’s particularly useful. We get that data from banks which are processing the data they have in people’s accounts in very useful ways. We also [have]—and I showed you—this data on mortgage payments; that wasn’t available many years ago. We get timely data on these mortgage payments, split into offset and redraw payments across all of the banks, with a very short delay. So, we’re always looking at new ways to get a timely read on the economy.

Thanks, Chris. One of my clients wants to ask a question, so I’m going to run across the room.

Hi, Chris. Just on your speech, it focused a lot on the cash flow channel, as you mentioned, and then noted some of the other channels. A lot of people, when they’re doing their assessment of how tight policy is or what a neutral rate is, are doing it through that cash flow lens at the moment. When the RBA is doing it, how are you moderating that view of the world and, I guess, what conclusions does it lead you to because, if it’s just cash flow, it looks tight?

Well, at a high level, when you’re trying to forecast the economy and use models to do that, and they’re quite fraught but they’re often the best that we have, they tend not to be so sophisticated as to break down all of these different channels and sift through them; they’re fairly aggregate. But this sort of analysis that I’ve presented in my speech says, ‘Well, let’s just be a bit careful about those.’ Let’s suggest that maybe the effects on spending, for example, might come through a little bit more slowly than otherwise and then, knowing that, let’s be vigilant and watch, watch really carefully: watch some of these things, these indicators, I just told you about; watch mortgage payments; watch payments into offset and redraw accounts; watch consumption indicators and timely things like that. So I think that’s how we tend to think about this.

We’ll see if we can get one or two more in; it depends on how long the answer is. The first one: how does the bank view bank hybrids? Are AT1 non-viability triggers artefacts of documentation, or does AT1 genuinely serve as a loss absorption tool?

Well, that’s quite a detailed question and better left for maybe some of the panel that follow me, and APRA. They’re an important part of the instruments that APRA has asked banks to raise to make sure that they’re unquestionably strong, and banks have plenty of those raised, and that’s a good thing.

Let’s see if we can squeeze one more in, Chris; there have been a few come through. Do you see a potential scenario where the TFF is extended in the event of sustained volatility in offshore markets?

I think it’s a bit too early to be asking that sort of question. As I said, the banks are very well advanced in their plans to pay back the TFF funds which are coming through this year—they got a lot of paper away earlier in the year—and they’re in a very good position to be issuing bonds in markets when those markets calm down a bit. They’re not going to want to be, like anyone, the first to go out there in stressed conditions; that’s normal, that’s good management. But, as markets eventually get through all of this and calm down a little bit, the Australian banks will be well served by their ability to issue bonds.

Brilliant. Thanks very much. Can everyone please join me in thanking Chris? Thanks for your time.

Thank you. Thank you all.

Applause—