Testimony of Reserve Bank Governor
- The Reserve Bank Governor has delivered testimony to the House of Respresentatives Economics Committee. Transcripts of the testimony have been released.
Selected comments from the testimony
- Provided below are some selected comments by Glenn Stevens (Governor), Guy Debelle (Assistant Governor, Financial Markets) and Philip Lowe (Assistant Governor, Economics).
Why lift rates in November, not October:
“Reasonable people can differ about these things—and we had quite a long discussion at both these recent meetings about when a step might be taken—but on balance, the way we came down was that, in October, I personally did not think the case was quite made but I was persuaded that we were across the line in November.”
RBA decision to hike rates in November
“But, having been involved in this process one way or another for quite a long time, I cannot think of very many cases in history where we looked back and thought, ‘Yep, we tightened too soon.’ I can think of several times where we looked back and thought we should have tightened a bit earlier.”
“I think it is better really to move in a reasonably timely fashion to a point where you might be able to rest for a while. That is a better position to be in.”
“Of course, we can never quite say that there definitely will not be any more but I think a lot of people probably would rather be in the position of knowing where they stand, at least for a period of time, than having the continual anxiety.”
Outlook for interest rates
“What it means is that for the period we are going into in the near term I think this is about the right level. At the moment, most commentators do not anticipate and market pricing does not anticipate any further near-term change by us for quite some time. I think that is probably a reasonable position for them to have based on the information we have now.”
Guy Debelle: “The market pricing only has the cash rate rising to five per cent by the middle of next year and rising maybe a little beyond that but not a lot, so not quite as much as the economists you are talking about suggest. (The consensus view of a number of economists is that the cash rate by 2011 will probably be around 5.5 per cent.)”
Glenn Stevens: “I am not sure myself, to be frank, where we are going to be in a year’s time—you cannot be.”
“We may need some more than we have at the moment at some point, but at this stage the expectations are for only fairly gradual and not very close together increases. At this point, I certainly do not want to steer people away from that today.”
“…there will probably be some more next year (rate hikes) and maybe a little bit more after that. It is not unreasonable to think that if you buy the central scenario that we have sketched out, which is that one way or another something will happen to take us off course. That is the central view. It is not unreasonable for people to think that, but that is just saying that it is unlikely there will be anything from us imminently, and I think that is probably a reasonable expectation of people just now.”
“I do not think it is sensible to speculate about increases right now.”
Terms of trade / Two-speed economy
“There is a multi-speed story, even within regions, I think.”
“This is a once or twice in 100 years event.”
“…it is almost a three-speed economy—there is the mining sector, the traded part of the economy that is not mining and is affected by the exchange rate, and the rest.”
Bank profits
“The rate of return on equity that the banks are earning is good. It is probably not, at this point, as high as it was some years ago. As we have said before in the committee, if my choice is between banks with good profits and banks with no profits then I choose the former every time from an overall macroeconomic point of view. People look at the overall size of profits in billions of dollars, but we need to be careful not to forget the size of the capital that is invested in these institutions, because you have to compare the two. The rate of return on equity of 15 or 16 per cent—something like that—that they are earning is good, but many Australian corporates would be looking to earn those kinds of rates of return, not just banks.”
RBA takes changes in bank rates into account
“But in the end the question is really whether all those people with a mortgage are paying seriously higher rates than they should be from an economic management point of view. What I am saying is that I do not think they are, because we have pretty much offset the change in the margins by doing different things in the cash rate from what we would have done had the margins not shifted.”
Wage growth
“We are seeing some pick-up in overall wage growth, at this point not faster than we had expected would be the case, given what has happened in the economy. Where is the line between too high and too low? It is hard to say, but I would think that this is a period now in which we need to proceed with some care.”
“I think, we would probably say those figures we had last week were not view changing. There is a larger increase in the quarter because the fair pay decision comes through in a lump, and in the previous period there was no increase temporarily.”
Unemployment can fall further
“There are at least some grounds to say that there is a bit more scope for labour demand to rise than you might think just by looking at the official unemployment rate on its face. I think that is a reasonable call. Having said that, our general assessment is that the amount of spare capacity in the economy overall is probably reasonably modest.”
Rates now above “normal”
“I would have said that the 4.5 cash rate, which is clearly well below what was normal before, is for all intents and purposes normal in the world we are in now where the margins have widened because it delivered a mortgage rate or a business loan rate that was pretty much the average of the past 15 years. As of the last decision, we have moved above that a bit now. I think we would have to say that, particularly given the increase in loan rates is a bit higher than what we did, monetary policy settings are a bit above normal now.”
Consumer spending
“Consumer spending is more careful and cautious now than it was and retailers will say that. Overall consumption is still growing, probably a little bit below average, but still rising.”
“My guess is that there has been a kind of sea change in people’s attitudes that we would expect to persist for a while.
“Retailers do find this tough. We hear this all the time from them. It is tough. People have money but you have to work harder to get them to part with it now than you did a couple of years ago. That is putting competitive pressure on pricing, which is one of the things that is helping us keep inflation low. A higher exchange rate is helping them do that because the imported products are getting cheaper. We have a bit more of that ahead, I think.”
Handover from public to private sector
“At an aggregate level our assessment is—and this was one of the uncertainties that we faced all year—will this handover occur on schedule or won’t it. We are still not 100 per cent sure, but we think that it is probably going to occur.”
Supply-side deficiencies
Philip Lowe: “There are obviously areas, in transport, in education, in health, where things can be done to improve the ability of the economy to produce goods and services efficiently.”
Glenn Stevens: “…but we are probably going to need more investment in electricity, are we not, over the years ahead, and water? Some of that is being done. There is a fair bit of urban infrastructure that would be desirable, as anybody who lives in any of our major east coast cities—or west coast, for that matter—would think. All of that has to be done, but we have to try to do that at the same time as we build more houses and build more mines.”
National Broadband Network: Public sector undertaking a project that the private sector rejected?
“Whether this is one of them would be another question. But I think you can imagine some projects that the private sector just does not feel it can take the risk on but on which the public sector—which, after all, has a stronger balance sheet than anyone else—might on some occasions be able to accept that risk. But there ought to be, of course, a proper cost-benefit analysis of that case in those instances.”
“We do not have a problem here of public debt sustainability. The fiscal issues that are relevant are the ones that were talked about earlier, such as the effects on demand and so on. I have never felt in recent years that the size of the public debt that we have outstanding is a material problem for the country.”
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