Transcript of Question & Answer Session Australian Financial Conditions – How Do We Judge How Tight or Easy They Are?

Chris, could I maybe take you back to – in my introduction I noted that – your role at the RBA. So what does, for ordinary citizens like we are, what does the Financial Management Group actually do - Markets Group, sorry, do day-to-day?

Well, a lot of what we do day-to-day is actually what I talked about in my speech. We do research and analysis on financial conditions, leading ultimately to sort of asking that question, are they tight, easy, neutral. A lot of my talk though is quite focused. I gave mention about global developments but a lot of it was focused on the domestic, sort of, financial indicators. But, of course, we look very much offshore - to offshore financial market developments, and especially what other central banks are doing, because those have important implications for financial conditions here.

Yeah, of course. Yeah.

So we do that. A lot of that work finds its way into the Statement on Monetary Policy, into Board papers, speeches and the like. But the other side of what we do is operational. So we’re responsible - if you like, when the Board pulls that cash rate target lever, that tells us we need to act. So we implement monetary policy. So some of that - that’s through domestic operations in markets, in money markets, working to implement that, generate the outcomes the Board’s asked. And we also provide along the way liquidity to the banking system. We manage the FX reserves, you mentioned that, including through our offshore offices in London and New York, so we can trade while markets are open 24 hours. We also are the banker for the government, and so that means in my area we purchase foreign exchange to meet the government’s needs. And then maybe perhaps less understood, but we interact quite a lot with the IMF, with the BIS Committees and we work closely with central banks in our region. So those are the sort of things. It’s very busy.

It’s very wide range.

Yeah.

So just to give us some context. How large is your team?

A bit over 150.

Right. And so you’ve been there, as I said earlier, nearly a decade now. What does leadership look like of 150 people within the RBA, I’m guessing quite technical people in many regards. So what does leadership mean for you in that kind of role?

At least for me coming in, the thing is I had spent the better part of my earlier career with a macro focus. I’d been the Bank’s chief economist.

Yep.

I’d spent time in payments and financial stability, I’d been at the IMF. So I had a very macro-focused background and not much in financial markets. So I think the value I add in coming in is saying to everybody, it’s okay to ask lots of questions. Sometimes those can be quite stupid questions, but sometimes stupid questions actually have a nub of something really important in them.

Sure.

And consistently be open to the fact that I’m probably wrong on things. And I think I’m very happy to be told how wrong I am because that means I really learned something in my day. So I think if you can illustrate that that’s an okay way of being, that’s a good way of leading a group like that because it makes them inquisitive and open to discussion.

Yeah. I was about to say exactly that. Curiosity and working out why somebody’s got a different view than your own is such a valuable thing to do. Okay. Now, suddenly all of my questions have disappeared. Jackie, I don’t know. There we are. Excellent. So - right. So now we’ve got quite a few more questions and you’ve all been very busy at voting them up, so thanks for that. That’s great. So let’s tackle a few of them. The most popular question is: What does the RBA think about the growth of private credit markets in Australia and indeed globally?

So it’s something we’ve been looking at. I think in Australia there has been quite a bit of growth, but in the scheme of things it’s still a pretty small share of total funding.

Right.

So the sort of concerns you might pick up if you’re reading the FT or publications offshore or looking at BIS or IMF publications, for example.

Or reading ASIC notices.

Indeed, yeah. Those sort of concerns in terms of financial stability, in terms of financial conditions, I think, are much less relevant here. It doesn’t mean they couldn’t become relevant. I think on the ASIC point that’s a good point. That was very much about - in a space which is quite unregulated it’s very important to have full disclosures. So investors coming in can come in with their eyes open to the risks that are being taken.

Okay. Very good, thank you. And the next question, interesting giving - interesting question given recent news articles about long queues in Martin Place. But is the RBA considering increasing the share of gold in its FX reserves?

I think the honest answer is no, it’s not something on my mind. I mean, we do hold stocks. They’ve been held very steadily since the late 1990s, when we sold down some of those reserves. But there’s no imminent plans.

Yeah. Okay. Good, thank you. Next question. Amid US and China tensions and shifting supply chains, how does the RBA view the impact on Australia’s trade and capital flows?

I think the direct impact for us has been so far, as best we can tell, pretty modest. I think the initial concern was just the effect of uncertainty this was creating and the adverse impact that might have on investment. I don’t think that’s been a significant factor here. I think the bigger concern is what it might mean for the health of our key trading partners, particularly China. China so far has certainly - their exports to the US have fallen significantly, but a lot of that seems to have been diverted elsewhere.

Yeah. Right.

And it doesn’t seem to have had a very significant overall effect, in terms of their - say, demand for our commodities, which is key. And if we look at those commodity prices, some of those key ones haven’t changed that much over the course of this year. Not to say that the aforementioned gold, of course, is an important commodity for us, but that’s unrelated, I think, to this trade uncertainty.

So you focus more on the impact on trading partners, especially China, rather than the Australian economy directly?

Well, there’s not much evidence that it’s having a very direct effect on us. Not that it’s not having any, but just not a significant one.

Sure. Okay. Thank you. We can’t have a conference these days without talking about AI. So how are you incorporating AI into your modelling? Or anything else?

Well, I mean, I think you’re seeing it having a pretty significant effect on the value of assets and therefore wealth. So you might be looking for it to have, sort of, effects there. It’s a contributor to easy financial conditions globally through higher equity prices. It’s contributing to significant investments, particularly in the US but not solely in the US.

Yes.

I think the big unknown is, what does it mean for longer term productivity, set against the backdrop of a trend decline in productivity over quite a few decades. Is this something that’s going to turn that around, and we just don’t know yet.

Yeah.

So something we’ll watch because financial markets are digesting all of that all the time. And at least in theory that should be captured by some of those neutral rate estimate models.

Yeah. Okay. Great. Thank you. Based on one of your first - or your early charts in your presentation that looked at interest rates over the last couple of decades, official rates recently kind of peaked at 4 or 5 per cent, in that range. So on a 20-year chart don’t look that historically high. And yet when we lived through that, especially for people a little bit younger than I am certainly who had never seen rates at 4 or 5 per cent, it seemed like the sky was falling in. So how do you, how does the RBA think about those recent rates in a historical context?

I think that was - you know, that was the point of that early discussion about the trend decline in the neutral rate estimates, because these are global forces; demographic change, the decline in productivity that mean any given interest rate, cash rate let’s say, is going to have more of a tightening effect on the economy than in the past. So you didn’t need - we didn’t to raise rates as far as 7 per cent to have the same effect as we might have done a few decades ago. A large part of that is that decline in, sort of, neutral rate driven by those structural forces. A little bit maybe on inflation, but remember inflation of late was fairly high but inflation expectations didn’t go up too much. But the Board was quite conscious of that, we were quite conscious of that, and therefore cautious and careful. Even though rates were raised quite quickly, we didn’t raise them quite as far as others and they did seem to have the desired effect, with everything else that was going on in the economy.

You must have to be really conscious of the way in which interest rates are transmitted to normal citizens as well.

Yeah. And, look, people do say, oh, but debt is so much higher so it’s going to have a much bigger impact. And that’s probably true through the cash flow channel to a degree. But as you could see as a share of people’s income that household credit hasn’t really trended up since, sort of, the early 2000s. And I think people tend to overestimate the cash flow channel as the most important transmission mechanism because I don’t think it is. It’s all the other channels that are still quite important. The exchange rate is an important one, but also the intertemporal channel. When interest rates are high, it provides an incentive for people who have borrowed to pay down their debts faster than they otherwise would. And for people who don’t have any more debt, to save much more than otherwise.

Okay. That’s a great perspective. So over - one question here is, over the last decade the cash rate has averaged almost 1 per cent less than CPI and tax rates worse than this. This is negative for productivity and Australia’s long-term prosperity. Why does the RBA insist on punishing savers and rewarding borrowers?

Well, I think part of those statistics reflect that period leading up to the pandemic where, as a central bank, we were struggling to get inflation back up to target.

It was too low. And, in essence, that reflect an excess of savings over investment, here and probably globally as well. So our objective is in trying to stabilise inflation and bring it back up to target was to stimulate the economy in the way that we can, and that was to keep the cash rate low. But I’m - you know, I don’t think that lower interest rates, or indeed higher interest rates, affect productivity in the long run.

Right. Interesting. Okay. All right. Last question, as we are approaching our time limit. What do you think is one of the biggest misconceptions that people might have about the work of the RBA or the role of the RBA?

Well, there’s quite a few.

But I haven’t mentioned housing in this conversation.

Well, yeah. That our policies are driven with an eye to having an effect on housing prices. Our goals are full employment and low and stable inflation. I think what’s increasingly recognised, to everyone’s benefit, but we need to make some inroads here, is that what really matters for housing prices, relative to incomes and affordability, is supply. We have temporary effects on demand, but I don’t think we have long run effects on demand.

Okay. Very good. Well, Chris, thank you so much.

Thank you.

Can I ask everybody to put their hands together and thank you.

Thank you, all.

Thank you, Chris.