BRR - Straight from the source

MR. GLENN STEVENS, GOVERNOR OF THE RESERVE BANK OF AUSTRALIA (1ACD)

“The Directors’ Cut: Four Important Long-Run Themes”

http://www.brr.com.au/event/51314

 

WEDNESDAY, SEPTEMBER 17, 2008, 02:00 PM.

 

            1ACD  We, certainly, are living through challenging times for decision makers, both in the private and public spheres. The past years, Allan has said, has seen a major change in economic and financial conditions. Global growth having

10                    been well above average for a string of years has slowed particularly in the major countries, yet inflation remains a concern. Large losses have been incurred by international financial institutions and indeed several household names in investment banking have disappeared recently. Appetite for risks which had been strong to the point of recklessness in some areas has abated

15                    and has been replaced by risk aversion. Credit is harder to get and is more expensive. Australia has been affected by these forces, but much less than the countries at the epicentre, and as Allan already said, our financial system is weathering the storm well. There is a storm, but we’re weathering it well.

 

20                    Well, amidst all the excitements even today’s excitement, it still seems to me sensible on occasion to step back from the very high frequency data or in events that we spend our days thinking about and to focus on the bigger picture. What I’d like to do today is to talk about four low frequency long-run themes that I think are important, though each of this nonetheless has been

25                    amply demonstrated in one way or another in the events over the past year or two. Those themes are, firstly, the emergence of China, secondly, the economics of the fully employed economy, thirdly, the end possibly of the long period of households gearing up their balance sheets, and finally, shifting perspectives about the role and the regulation of the financial system

30                    in the economy.

 

                        So, let me begin with some remarks about China. I’m not talking here about the notion of de-coupling, so-called, I actually think that’s a non-helpful term because nothing ever is actually de-coupled. Everything really is connected.

35                    The thing is that the connections are complex and there are a lot of forces at work which operate in different directions, and so reasonable people will have differing opinions about how things will play out over the next year. I’ve got quite a wobbly lectern here, I hope that’s not a sign of things to come. I’ll just move it around and see if I can get a more stable foundation while I’m talking.

40                    At present I think it’s actually slowing down partly as the result of the US slow down and the slow down in Europe, and partly also by design. Now, policy makers, they have been attempting some slow down because of clear evidence of overheating in the Chinese economy and they, I think, achieved that to the point where they’re now in the position, earlier this week, of being

45                    able to remove a little bit of that restraint in the past couple of days. But the long term emergence of China as an industrialising economy is a fundamental change to the economic, financial, and political landscape whose four consequences, I suspect, we cannot as yet appreciate fully. That’s being happening, of course for a couple of decades but the way in which it has its effects has been shifting.

 

                        For some years, China was too small to have all that much impact abroad

5                      even our country with a lot of people is economically small if their per capital income and productivity is very low, which it was in China for sometime. Then sometime in the 1990s, China became quantitatively informed enough that we began to notice the effects of millions of Chinese workers becoming productive and putting manufactured products into the world economy, and

10                    so we enjoy the disinflationary impact on prices of that effect. In more recent years, we’ve been experiencing another phenomenon of Chinese growth, namely, the effect of rising Chinese living standards on the demand for raw materials and energy as they seek, not surprisingly and understandably to have a standard of living more like our own. Of course that effect isn’t

15                    confined to China, it’s happening around the developing world, but China is obviously the biggest example of that phenomenon.

 

                        Well, commodity prices are coming awfully high at the moment, though the key ones for Australia remained quite high still. Even if this marks a

20                    cyclical turn for this process, longer term, it seems to me that this new claim on resources and energy out of China and other places won’t get away, it’s going to be a permanent feature of the landscape. Other countries including ourselves therefore have to adjust to that and we are doing so, and that adjustment can be in some ways difficult. Certainly, the rise in prices for

25                    energy has made it harder for the rest of the world to combine steady growth and low inflation in the same way that we did from the mid-1990s until just a few years ago. So that’s one adjustment that all countries elsewhere are undertaking. At the same time, this extraordinary increase in demand for raw materials has raised Australia’s terms of trade by about two-thirds in the

30                    space of five years. I know I keep harping on this but this is the biggest event of that kind in five decades or more. So, for Australia, the economics of this episode are actually more complex than they are for the average industrialised country.

 

35                    Like others, in the energy using parts of their economy, it’s harder now to combine steady growth and low inflation as easily as we did from the mid-90s until recently. But on top of that, we’ve had to absorb a massive boost from national income. Now of course, there are worse problems to have than having to absorb a massive boost to your income. I’d rather have that

40                    problem than some others I can think of. Nonetheless, that brings significant adjustments to the structure of the economy, to where the population lives, to have a national income is earned and distributed. Those adjustments are ongoing and unless resource prices reverse a long way, those adjustments will continue in the period ahead.

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                        So, the main point is, China’s emergence is far from complete. Like all economies, it will have a cycle, but its average growth rate is likely to be pretty high for a long time ahead, even if not quite as high as has been just in the past couple of years. That’s an opportunity and the challenge for Australia, for our business leaders and our policy makers and probably not just in the resources sector. So, that’s my first theme.

 

                        The second theme is the economics of full employment. That’s a good thing

5                      we can even talk about that actually, but over recent years, I think it’s pretty clear that the Australian labour market has been as tight as anything for generations. The rate of unemployment in the past year, at around 4%, has been as low as anything since 1974. In our surveys and discussions with firms, difficulty securing labour has been a very prominent thing for several

10                    years.

 

                        The term capacity constraint has become a part of the Australian lexicon over recent years in a way we haven’t seen for a long time. Survey measures of capacity utilisation have been very high. They’re coming down a bit now, but

15                    they’re actually, at this point, still fairly high, and fixed investment to increase capacity is, of course, running at a high pace. So we’ve been pretty close to full employment. Let’s be clear but that’s a good thing. It’s one of the objectives or Reserve Bank has actually in our past and whilst the date since 1945. Although interestingly, the authors of those were never defined

20                    numerically exactly what they meant by full employment or for that matter by the term stability of the currency, which we take to mean controlling inflation. But leaving that aside, we have been more or less at full employment in recent times.

 

25                    The economics of full employment though are different to the economics of trying to get to full employment when you’re below it. That’s a simple point but it’s very important. When the economy has too much for a capacity, say in the aftermath of a business cycle downturn, the intention of policies is to grow demand quickly to catch up to potential supply. There may be several

30                    years, in fact, in which the growth of demand is faster than average while you eat up that spare capacity. But once that spare capacity has been wound in, the growth in demand and actual output has to slow down to match the growth and the supply potential that the economy has. That potential supply growth is given by the growth in the labour force, growth in the capital stock,

35                    and the growth in the productivity with which we deploy those factors of production.

                       

                        Typically, economists think of potential GDP growth in Australia as something like around 3%, give or take a bit in real which is my predecessor,

40                    Ian Macfarlane, remarked a few years ago, means that once these reserves or spare capacity have been used up, we should expect to be accustomed to growth rates for GDP starting with a 2 or a 3 before the decimal place, not the 4’s and 5’s that we saw over many years through the 1990s and in early part of this decade. They won’t be many years like that anymore if we’re starting

45                    from position of pretty much full employment. Periods of growth above 3%, thereabouts, will probably be matched in duration and size by periods below 3, as we’re having now. If we set our aspirations higher than that, if we try to grow above average all the time, we won’t actually get much more growth, we will just ger inflation. So, that’s the economics of full employment.

                        Now, you might feel that a growth of real GDP of 3%, give or take a bit, is not that high. It’s actually pretty good compared with many and advanced countries, but you might feel perhaps that’s a bit low. Could we raise it? Can we do better? Well, the only way that we can do better, isn’t just by pumping

5                      up demand, it’s by raising the rate of growth of potential supplier, and we can do that by adding more factors, more labour, more capital, or we can raise the growth of productivity, and in the long run that productivity, I think, is the key one. On that front, productivity growth in the recent years does seem to have settled to a lower average pace than we saw pretty most of the 1990s

10                    and the early part of this decade, that may have several courses and the experts debate those, but that is what the data seemed to show.

                       

                        So over the years ahead, it seems to me as a community we must not let up on our efforts to foster as much growth and productivity as we can. Now, I

15                    haven’t come with a list of specific policy prescriptions here, and indeed, part of the problem in this area is that, it’s hard to be prescriptive in a very precise way. I think the general points that are trying to sustain competition, to keep markets open, to maintain flexibility, and all those things which have been hallmarks of Australia’s economic policies for many years now are the key

20                    things, and it’s important I think, occasionally to articulate those things. So that’s my second theme, the economics of full employment.

 

                        The third theme is household balance sheets which, of course, have been a big feature over the past 15 years or so in many countries. In the early

25                    1990s, gross household debt in Australia amounted to about 60% of annual income for the household sector as a whole. This year it reached 160%. Household assets grew roughly in parallel but not that quite as quickly but almost as quickly. So total assets were 460% of income in 1990 then about 800%, although it came down a little bit this year with the fall in the share

30                    market and some softening in housing values.

 

                        Debt to assets or leverage, if you like, has risen from about 10% in 1990 to about 18% now, which is not extraordinarily high by any means internationally, and the ratio of housing debt to housing assets has risen to

35                    about 27%. Well very similar trends to that have been seen in a lot of countries around the world. So, in thinking about why it occurred, it’s very important not to look only for locally specific explanations. But in summary, the main factors behind that trend, were I think, firstly, a general tendency for assets and liabilities to rise faster than current income, that’s a feature of

40                    all sophisticated economies and has been at least since World War II, but that’s one being the trend.

 

                        Secondly, in the period in question, an increased pace of financial innovation particularly the availability of credits to households increased a lot around the

45                    world. Once upon a time, I think capital markets were seriously inaccessible for many households. But in the past 10 years, any household anywhere in the world who was credit worthy and some who weren’t, were able to get as much credit as they wanted.

 

                        A third factor which is quite important is the decline in inflation which took place in Australia in the early ‘90s and in other countries earlier than that. The reason that’s important is that it brought down nominal interest rates a lot and for households in particular, it’s the nominal rate that really matters

5                      because it drives the number of dollars you can pay out of your current income to service the liability. So that was a big factor and of course, a very welcome one.

                       

                        A fourth factor was there was a pretty long period of quite low long-term

10                    interest rates globally. This is more a global factor than in Australia specific one, but that did prompt a lot more borrowing particularly in the US and of course, it wasn’t the Central Banks that set those long rates, it was the markets. Without going into a long anticipation here, I do think myself that they do a lot of saving in Asia, among other things had a lot to do with

15                    that long-term interest rates being quite low.

 

                        Finally, there’s been a desire, a normal desire to devote a higher share of a rising income to housing services over time. As people’s income increases, certain goods and services will assume a smaller proportion of their spending.

20                    Food, for example, or a lot of manufactured goods, clothing would be another, gets smaller as a share of their consumption bundles, as we get richer, and so-called superior goods like health, for example, take a bigger share of their consumption bundles as we get more affluent. Housing, I think, in Australia at least is tended to be in that class. Our aspirations in terms of position,

25                    quality, size of housing, have increased as we’ve grown more affluent, naturally enough, but for various reasons, the supply is not elastic. It’s only in so much well-located land and other factors that affected the supply process of dwellings. So in the end, we’re devoting a high share of our income to acquiring the services of housing and we mainly do that by servicing larger

30                    mortgages. So all those factors have been at work pushing up household borrowing over the past, probably nearly twenty years.

 

                        A question, I think, is whether that long period of gearing up might be approaching an end. Certainly at the moment, household credit growth is

35                    much slower than it’s been for some years. It’s growing roughly in line with income after many years of having grown much faster. Might we see this more conservative approach persist, well it’s hard to know the answer to that question. Certainly, there’s a lot more of the household balance sheet which could yet be collateralised and plenty of innovative lenders, I guess, thinking

40                    about how to do that once the current turmoil passes, so gearing up might resume in due course. But there’s also a chance, it seems to me that households might seek to contain and consolidate debt for sometime that they may grow their consumer spending more in line with their income and save more of their current income than they have in the recent past, and it

45                    seems to me possible that we’re witnessing the early part of such a phase. Time will tell, but if that is the case, then the growth opportunities for businesses and financial institutions in the years ahead will be a bit different to the ones we saw in the past fifteen years. Whereas the household balance sheet was the big story from the mid 90’s to now in many countries, some other financial trend is more likely to be the big trend in the next ten years. What might that be? Well, I think there are some developments around suggesting that the balance sheet of government is going to be ours to expand a good deal certainly in the near term as they support the finance

5                      sector in countries like the United Sates or the UK and maybe one or two others. In Australia, we don’t face that, though I suspect that the build up in public infrastructure which is planned and which is needed may point in the direction of government balance sheet as expanding. If the recent sudden aversions of those sorts assets for private investors were to continue then

10                    governments might then have to choose whether to find more of those projects themselves or to defer them. Fortunately, public balance sheets in this country are in a very much stronger position than almost any other country you could know. Most governments would kill for the set of physical accounts like the ones we have. So that’s the third theme, household

15                    balance sheets and how the future marks looked a bit differently.

 

                        The final theme I’d like to talk briefly about is financial stability and regulation. Of course, we’ve just talked about all these issues surrounding the availability of the public sectors balance sheet to help out the financial sector and even

20                    today as you’ve no doubt read before you came here, there is a very large amount of support about to be extended by the United States authorities to AIG. We’ve also seen the actions by the US Treasury to take over the running of the entities known as Fannie and Freddie, a week or so back and as Secretary Paulson commented at the time the ambiguity about who was

25                    bearing the risks in those entities is actually been a problem for years and it needed to be resolved. So the US government has shouldered their responsibility that investor always assumed that it would but has quite appropriately done that in a why which minimizes the extended bailout for private shareholders who were enjoying the profits in early years.

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                        Well, facing up to those problems where the entities concerned would defect the public as Fannie and Freddie really were or at least get guaranteed by the government, that’s one thing. The question of support though has also a reason for entities which have always been purely private, and which at least

35                    of the two have not explicitly being regarded as so systemically important, so essential that allowing them to file would be very dangerous. The events of the past few days, of course, illustrate how difficult these issues have become. Without wanting to talk about that in any detail, all these cases, I think, show that in the final analysis they was not enough capital behind the

40                    risks that were being taken in these instruments by these Institutions.

 

                        The sophisticated financial system of the 21st century was supposed to manage risks and spread it around, but in fact a lot of the risk ended up being concentrated on the books of highly leveraged institutions. High risks and

45                    high leverage proved to be a fatal combination, you know what it does. So I think some significant questions emerged from this, a whole of host of them in fact, but the main one that I want to focus on is the broadest and simplest one which is whether something can and should be done to dampen the profound cycles in financial behaviour with associated swings and asset process in credit given the damage that they potentially can do to an economy.

 

                        Actually, that debate’s being going on for quite some years in official circles

5                      and there are several points of view. One of them is the kind of regulatory responses using the power of the prudential regulator. Thanks to the bosses of and so on should be taken to dampen the so-called financial accelerator. By the financial accelerator, I mean, the process whereby confidence raises asset prices which raises collateral values which then allows people to buy

10                    more which pushes up asset prices again and so on until at some point the whole thing starts for go in reverse and then there’s a fall in asset values and the degree of leveraging as is happening around the world at present time. Well, use of prudential tools to work against that phenomenon would actually, I think, be a departure from the white prudential supervision has been done

15                    up to now where the goal has been the silence of individual institutions and the supervisors have not been charged with the responsibility of managing the dynamics, the stability for the system as a whole so it would be a departure.  On an account of view that surrounds is it isn’t really possible to do that with prudential tools for a host of reasons. Some of those have to do

20                    with tax and accounting rules, another one is that some of the key players are outside the regulatory net investment banks for example, but also hedge funds and so on.  So that view tends to hold that it probably won’t work to just rely on prudential supervisory tools to handle this financial cycle, if you decide if that’s what you want to do, and that an effective response

25                    inevitably would involve using monitory policy. Now that would mean raising interest rates in terms of booming assets and credit markets even though good and services inflation remains low in order to provide a stabilizing influence over these swings in behaviour or needs in liquidity.

 

30                    Now some people argue that you can reconcile like the standard of inflation targeting, but only if the time period for the target is quite long, a lot longer than when it is through inflation targeting countries at present where the Central Bank is given a deal of flexibility. So that’s another view that has been around over the years. Our third view, is that it isn’t possible, at least with

35                    policy makers current knowledge, to know whether it’s correct to lean against asset booms. In fact, it could be destabilizing to try, and that actually is a respectable view unless some research in favor of that view. So on that view, what that view holds is that the only thing you can do is respond to the collapse even when it occurs to try to protect the financial system, and clean

40                    up the mess, so to speak., and that’s tended to be the US official view at least up to this point. That debate is quite active, actually in this whole debate about what you do with this asset and credits swings is quite active following the collapse of the dot.com bubble in the early 2000s. Those in favor of more policy action on these fronts didn’t get much traction though because, I think,

45                    mainly because the US economy recovered from that episode quite quickly. In fact 2001 was quite a mild recession for them.

 

                        I sense now though that among forceful people these whole set of questions is once again coming up for (inaudible) (00:28:48) and I’m not proposing to take a position in that debate today, merely to say that I think that debate is underway. It will proceed over the next several years and that it would be fascinating to watch how it unfolds.

 

5                      At this point, I won’t keep from your dessert any longer, let me finish. In the barrage of information that we get everyday, it’s often hard to stand back and think about the big forces at work. But if those forces, I think, and our responses to them that will shape the economic and financial environment over the long term more than the short one financial (inaudible) (00:29:34).

10                    So hopefully, despite all the turmoil, we can all find some time to think about these issues and in that spirit that I offer these remarks today. Thank you very much for your attention.

 

            1ACD  Thank you, Glenn. Thank you very much for sharing those perspectives.

15                    Now, the Governor has kindly agreed to take questions. We have quite a few media here today and the way we normally do things at (inaudible) (00:30:07) is we do take questions from the media but towards the end of the question sessions so there will be a specific opportunity.

 

20                    Now those of you who would like to ask questions, can I ask that you signal by raising your hands because then someone will bring you a microphone, and that is important. Is there’s somebody there? That is important because this is being recorded and the audio will be available. So do we have a mic? Somebody over there? Yes, here we go.

25

            Q         Thank you. Governor, Stephen Walters from JP Morgan. I know that you are reluctant to talk about our short-term financial news but I’m just wondering if you can perhaps tie together what’s happening in markets and what the macro implications might be if I tied into your first point about China in

30                    particular? What perhaps the full (inaudible) (00:30:55) from this macro event might be on Australia given our terms of trade which you again mentioned as a very important stimulus to the economy? I note also that China has moved to its policy as you mentioned but the Federal Reserve of course this morning did not, so I’m just (inaudible) (00:31:12) your thoughts on that.

35        A          Well, I’m not going to offer commentary on what the Fed, did or didn’t do, my Chinese counterparts. The view that we have on China is, as I said earlier and I think we’ve said this out in some of the recent publications as well, I

40                    think China is slowing down. They have to slow down and they were trying to do so. Like anybody else of course they won’t want to slow too much and the Chinese authorities’ usual aspirations for GDP growth in a much bigger number than those most of the rest of us would contemplate. They think ten or eleven or twelve is too strong but I think they probably being six or seven is

45                    too low so they are slowing. Our forecast for the terms of trade, which is sort of the summary statistic of all these for Australia on the trade connection front is in the public domain in the S&P over few weeks ago. I’ve seen no reason to change that forecast at this stage and that forecast is that we’d probably reach the peak and they’ll come down a little bit. Now, that’s the forecast that I think most of us who are in the forecasting business have been making for five years. We’ve been wrong every year so far but (inaudible) (00:32:50) always used to say we keep making a forecast and long enough eventually we’ll be right so this may be a moment to take his advice.

 

                        Question there.

5

            Q         Oh, thank you. I’m (inaudible) (00:03:12). Thank you very much, Mr. Stevens, for a very interesting outline of some of the longer term issues. One of the things that’s fascinating me is how do you deal with sort of a 2-speed or even 3-speed economy that we have in Australia as you think about things,

10                    whether it’s by sectors or by geography, is that …actually have quite different economic characteristics and respond differently to the policy. How do you deal with those kind of questions around the table when you do think about…?

 

15        A          Well, yes, that’s a question that has been asked a number of times over recent years and it’s a fair enough one because the terms of trade shock we we’re just talking about, in its initial impact, at least, is not geographically or industrially even, obviously. That said, what we observe is that the effects do spring across the economy there, and there are many mechanisms in the

20                    economy through which that occurs and you know my usual quip is minus by holdings, but the point is that the expansionary income effects that come to the mineral sector then find their way to other parts of the economy because that sector looks to expand its infrastructure, solid construction gains, everybody who’s a consulting engineer or an explorer, all these people, get

25                    stronger demand for their services. The income going slow to shareholders, many of which live…some of them live up abroad of course but many live around the rest of the country. So, there are a lot of mechanisms that spread the impact around.

 

30                    The initial impact is isn’t even but if you have the shock today and then look at the economy three years down the road, you usually will find that the effects have started the spread around reasonably promptly and indeed we track measures of dispersion of economic performance and I think those measures probably are showing the dispersion starting to increase again a bit

35                    now but over recent years. On the whole, those measures of dispersion are not unusually wide compared with longer round history and I think the reason is that these effects do eventually spread around the economy. So that’s the first point. Ultimately we’ve got one instrument. Australia is a currency area. We have to set monetary policy for the country as a whole. Actually, there are

40                    minor differences in inflation performance across regions but they’re not very big, so at least the target variable isn’t subject to all that many speeds by regions. That’s all we can do and it’s up to the other mechanisms in the economy, some of which there are account of ameliorate some of these regional differences.

 

45                    One right over there.

 

            Q         Good afternoon. Scott (inaudible) (00:36:24) from the Commonwealth Bank. Governor, thank you for the presentation. You commented on private balance sheets, personal balance sheets, and you talked about public balance sheets. I wonder if you would extend that thinking to corporate balance sheets, how well positioned is corporate Australia to cope with the winds of change that are coming through at the moment?

5

            A          That’s a good question and I made some comments about this in my parliamentary evidence the other day. On the whole, as we see the balance sheets of corporate Australia are very strong. There are exceptions but there are some entities with high leverage and complexity and those are the entities

10                    that are under pressure at the moment. We know, we all know who they are but for the vast bulk of the corporate sector, as best we can tell, balance sheets are in very strong shape, corporate sector is quite liquid, and profitability, generally, is pretty good too and therefore maybe it’s not that surprising that at least those stated in the most recent capital expenditure

15                    survey data or investment intentions remain remarkably robust, I would say, given that the other circumstances in the world. So I think with the exceptions of some parts of the business world that had complex and leveraged structures and they are minority, the rest of the corporate sector is actually in very good shape.

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                        Over there.

 

            Q         (inaudible) (00:38:14) and any financial -- I think just yesterday I thought it was marvellous the way the Australian economy held up even though that the

25                    Australian dollar fell down to 79 cents. I was surprised that in the fact that it has held up but it did (inaudible) (00:38:35) and over 20% since they just gone down. Now, just one thing on macroeconomic performance that has also gone off, and you have mentioned that the Australian economy is not at the slow. We need it more on macroeconomic performance. The other thing

30                    is that on savings, we going through a new savings and that’s where our government has come in and started the Australia Fund then go on into House of an Education. So, but the main thing I think I want to ask you is about as why the Australian dollars fallen as much as it has considering as what happened yesterday. The Australian markets hasn’t fall unlike the rest of

35                    the world have.

 

            A          Well, I’ll give a couple of comments processing it by saying I normally try to avoid commenting on exchange rates because if there’s one variable which the economics fraternity is quite poor in forecasting, that’s the one. I think

40                    when someone tells you why did something move that way there, the only really honest answer is more sellers than buyers which is usually not regarded as satisfactory to give your boss. But I think what we’ve seen over recent months is a few things. We’ve seen a change in expectations about interest rates in Australia. At the moment, the market is pricing a

45                    considerable further raising by us. I have no comment today on whether or not that will occur but that is what’s priced in and that must affect exchange rates.

 

                        The world’s economy I think is now looking slower that it did some months ago. A number of countries have had quite a poor June quarter, I think a lot of that was due to the shock surge in oil prices. Actually, that’s a common shock that many countries have experienced, but nonetheless whatever the

5                      reason, global growth and expectations are being revised down a bit, and so our expectations for many commodity prices and our currency is usually affected by changes of sentiment there. Of course, there are waves of risk aversion flowing across the world and that also affects currencies as it does all markets, and that’s probably being a factor. Whether it’s fallen as far as it

10                    should, I would not necessarily endorse any particular view that whether it’s at the right level. I don’t think that would be sensible but you can at least directionally, I think, understand why it fell from the peak that it did over that short period. Now, from here, while I wouldn’t want to speculate about these matters, it’s not wise to do so.

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                        Next question. Getting my pads on my straight back ready for...

 

            1ACD  Well, I think we could take media questions.

            A          Sure, fire away.

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            1ACD  I think we can take questions from the media now.

 

            A          I’ll just pad up for this then.

 

25        1ACD  I think there’s somebody there who like to (inaudible) (00:42:21)

           

            Q         Governor, Chris Mayer from the Seven Network. We’re being told by our politicians that the economy is going well but we’re weathering the storm. Australians may be surprised by this that our relatively small economy is

30                    weathering the storm. How can they have confidence that that will remain the case, though?

            A          Well, I think we can have confidence in the robustness of our banking system. That’s I think well-known fact. We’ve got good policy frameworks in place,  we’ve got a pretty flexible economy. The floating exchange rate we were

35                    just talking about, whether or not we like or agree with particular movements, that’s been a mechanism that in the face of shocks in the past has helped the economy adjust. So think they’re all strong fundamentals and we do not have and haven’t ever had the sorts of root problems in housing finance that the countries who are really in deep trouble have had. That’s the fundamental

40                    difference and I think that difference is as clear as night and day. So I think the facts and some confidence in our own abilities to hold our heads, keep our heads and be sensible, I think the facts support a quiet confidence, not some kind of, you know, over the top optimism but some quiet confidence that the economy will cope well with the shocks we’re facing and I think that’s

45                    the evidence we have so far.

 

                        Next.

 

            Q         Richard (inaudible) (00:44:14) from IBC Radio. Has the events of the last few days that shock to the financial system globally given the reserve bank more support in terms of global growth forecast and monetary policy settings for Australia?

5          A          Well, I don’t think I’m going to start commenting on forecast revisions or otherwise on the run in the midst of all these events. We’ve got a process that evaluates all this information and it’ll lead up to the decision point and that process will unfold in its normal way, and the board will make a sound and balanced decision next meeting and all the ones after that.

10

                        There’s another question?

 

            Q         Andrew Robertson from the Lateline Business Show at the ABC. Can I just follow up that question and I hope you still got your straight pad, I mean when

15                    a time bomb comes at you out of left field, I mean, how much harder does it make you a job?

            A          When I what comes?

 

            Q         When something comes out of left field, like we’ve seen in the last few days,

20                    how much harder does it make the Reserve Bank’s jobs a big event overseas that are going to have an impact here?

            A          Well, shocks happen in economic life, and when they come you have to evaluate them and work out what they mean and craft your response accordingly and that’s always being true. These shocks are unusual ones but

25                    if I think back to the past ten or fifteen years, we’ve had some other pretty big ones as well and we’ve managed to find a way through them and I think we can on this occasion as well.

 

            Q         Governor Stevens, Oscar (inaudible) (00:46:06)) from SBS TV. In your

30                    speech you raised the issue of full employment, so this is quite a new concept in the public sphere in terms of what they’ve heard over the last year. Can you explain if the unemployment rate continues to stay as it is or if it indeed dropped, will you feel compelled to keep the cash rate as it is, or will you indeed raise it or will it have no bearing on your decision?

35        A          Well, I don’t think full employments as a concept ought to be a new one. I think we’ve actually been pretty much at full employment for a couple of years now and that’s an objective of economic policies after all. So I don’t think it ought to be seen as novel and I would not myself subscribe to the view that some particular path for the unemployment rate per se dictates any particular

40                    monetary policy action. We’re not ideological about what’s a minimum rate of unemployment might be, we’re pragmatic about that. What guides the decision is what are the prospects for inflation and overall economic performance over the period ahead and what can we do to keep those things on track, that’s the question we have to ask and the labour market figures I

45                    want input into that question but one among a whole host. So there’s no particular nor has there ever been any particular linkage from a numerical unemployment rate to a particular interest rate decision.

 

            Q         Governor, John (inaudible) (00:47:59) from the Financial Review. You just made a comment before that business investment remains remarkably robust where in the fact the expectations for fiscal 09 and indeed the myths that released this week also stated that but there was also a hint there that maybe

5                      these expectations could be a little bit optimistic? Given the financial crisis overseas and also the sliding in the domestic economy, is it likely that maybe business will have to revisit those expectations and how likely do you think that they’ll be fulfilled?

            A          Well, I mentioned businesses are continually revising their plans. I think what

10                    I found remarkable about those data was that you would have expected a downward revision to occur in these figures. In fact, you got enough with one. Now, I can’t think of reasons why the most optimistic set of numbers there are probably why it occurred and we would be actually assuming that the most optimistic expectation might occur but to me what was remarkable

15                    was just how much confidence, at least those businesses and this is a sample of 5,000 firms, seems still to have in the outlook for their own companies and for the economic situation generally and these data where taken in July and August. So they’re not months out of date, they are quite recent so it’s a yearend of the global turmoil and at least six months into, you

20                    know, more subdued conditions at hand that’s why I found them quite striking but I would have to mention as time goes by that not all those plans probably will come to pass. If they do, then the economy will be considerably stronger than we are currently forecasting.

 

25        Q         Governor Stevens, it’s Sue (inaudible) (00:50:13) from ABC Radio. You said that South Australia financial system has weathered the financial turmoil well, are you’re expecting more nasty shocks from Australian financial institutions and were you surprised when you heard say the National Australia Bank get out provisions of more than $1 billion from debt related investments in the US?

30        A          Well, we they had those exposures and they have to disclose them and provision accordingly. That’s their job, that’s what the resolutions would require them to do, so they did the right thing but let’s keep this in perspective. The Australian banking system, even in the cases where there

35                    had to be some provisions or write-downs, we’re talking about profits being slightly lower than they otherwise would be but still very good profits, still ample capital, still an ample access to funding, more expensive certainly but this is likely as a warning from what’s happening in other banking systems around the world. If you draw the chart of Australian banking profits compare

40                    that to the United States or Europe, you know, there’s (inaudible) (00:51:27). So the main point here is that these institutions remain very strong and I think that will continue to be the case.

 

            Q         Jessica (inaudible) (00:51:43) from the Sydney Morning Herald. Governor, I’m

45                    just wondering if you could tell us how the events of the last two weeks, and in particular the falling global oil prices and also the financial shock have affected your thinking as expressed in the latest 40 minutes between easing (inaudible) (00:52:00) too soon and easing it too late?

            A          That’s a very eloquent and subtle way of asking what are we going to do. It is your job to ask, Jessica. It’s my job not to tell you.

 

INTERVIEW CONCLUDED

 

 

 

 

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