Philip Lowe: Remarks at Reserve Bank Board Dinner
Remarks by Mr Philip Lowe, Governor of the Reserve Bank of Australia, at the Reserve Bank
Board Dinner, Melbourne, 1 October 2019.
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Good evening. On behalf of the Reserve Bank Board I would like to thank you for joining us at this
community dinner. The Board held its monthly meeting here in Melbourne today. This was the
first meeting that we have held in our new offices on Collins Street after last year selling our
building on the corner of Collins and Exhibition Streets. So even if we are in a different location, it
is really good to be back in Melbourne.
As you are probably aware, at our meeting today, the Board decided to cut the cash rate by a
quarter of one per cent to 0.75 per cent.
This decision followed a detailed assessment of both global and domestic developments.
Globally, the main issue at the moment is the uncertainty generated by a series of geopolitical
events, particularly the US-China disputes over trade and technology. Understandably, this
uncertainty is causing many firms around the world to sit and wait before proceeding with costly
investment decisions. At the same time, many businesses are having to deal with disruptions to
their supply chains. The result of all this is that after a period of reasonable growth in the global
economy, the risks are clearly to the downside.
Central banks are responding to these downside risks by lowering interest rates. With inflation
low - and expected to remain low - they are seeking to take out some insurance against the
possibility of a noticeable slowdown in economic growth.
From a longer-term perspective though, central banks have for some time been responding to
fundamental shifts in the global appetite to save and invest. The underlying explanation for low
interest rates globally is that the global appetite to save is high relative to the global appetite to
invest.
Like many things in economics it comes down to supply and demand. When the global supply of
savings is high relative to the global demand for funding to invest in new capital, the price of
savings - or the global interest rate - is going to be low. There are certainly other factors at play
as well, but savings and investment decisions are at the heart of the issue.
This means that the key to a return to more normal interest rates globally is addressing the
factors that are leading to the low appetite to invest, relative to the appetite to save. This is mainly
a task for governments and businesses, not for central banks. Whether or not this will happen,
only time will tell. But as a central bank in a small open economy we have to take the world as we
find it. While we might wish it were otherwise, we can't ignore these global trends and their
impact on our economy. So, the Board is watching these global developments.
Domestically, the Board today discussed how the Australian economy appears to have reached
a gentle turning point. The economy has been through a soft patch recently, but we are expecting
a return to around trend growth over the next year. There are a number of factors that are
supporting this outlook. These include the low level of interest rates, the recent tax cuts, ongoing
spending on infrastructure, signs of stabilisation in some established housing markets, and a
brighter outlook for the resources sector. Together, these factors provide a reasonable basis for
expecting that the economy will remain on an improving trend from here.
The Board has also been paying close attention to the labour market. Over recent years,
employment growth has consistently surprised on the upside, which is good news. At the same
time, the strong demand for workers has been met with strong growth in the supply of available
workers, with the participation rate now at a record high. Partly as a result of this flexibility on the
supply side, unemployment is a little higher than it was at the beginning of the year, and there has
not been much upward pressure on wages. In turn, this has contributed to the extended run of
inflation outcomes below the medium-term target range.
In considering these developments today, the Board decided that it was appropriate to ease
monetary policy further. We are seeking to make more assured progress towards both full
employment and the inflation target. We still expect to make progress on both fronts, but that
progress is slower than we would like. Today's decision will help.
In reaching that decision, the Board recognises that the impact of monetary policy on the
economy has changed over time, and that there can be some undesirable side effects from low
interest rates. The many people who write to me saying how low interest rates are hurting their
finances serve as a constant reminder of this.
But, importantly, the Board also recognises that monetary policy still works. It works to support
employment, jobs and income growth across the economy. Today's decision, together with our
decisions in June and July, will assist on each of these fronts. In doing so, these decisions will
promote the collective economic welfare of the Australian people, which we need to remember is
the ultimate goal of monetary policy.
Even so, my earlier point about the solution to low interest rates globally is relevant here in
Australia too. We will all be better off if businesses have the confidence to expand, invest,
innovate and hire people. Given Australia's strong longer-term fundamentals this should not be
out of our reach, but it does require constant effort. One part of this effort could be a renewed
focus on structural measures to lift the nation's productivity performance.
At our meeting today, as well as considering monetary policy, the Board had its six-monthly deep
dive into financial stability issues. On Friday, the Bank will be releasing the results of this in our
Financial Stability Review. Ahead of that, I would highlight three issues we discussed.
The first is that internationally, there seems to be a disconnect between the uncertainty that
investors feel about the economic situation and the compensation that they require for holding
risk. Normally when people feel uncertain about the future, they want to be compensated for
taking on risk. At the moment though, despite the uncertainty, credit spreads are low and asset
prices are generally high. At our meeting today we talked about the possibility that a shock
somewhere in the global system could cause a recalibration, leading to a disruptive repricing of
risk.
The second issue is that the resilience of Australia's financial system has steadily improved over
recent times. The core capital ratios of our banks are now well within the top quartile of banks
around the world. Our banks are well placed to withstand a wide range of shocks and their
position will be further strengthened as they meet requirements to increase their loss absorbing
capacity further over the next few years.
Lending standards have also been strengthened, although in some areas the pendulum may
have swung a bit too far. It is important that our financial institutions support small businesses in
particular. Lenders should not be so scared of making a loan that goes bad that they don't
provide the credit that the economy needs.
One other risk area that we are paying close attention to is cyber and technology risks. Banks'
systems have become more complex and digital platforms are now key to banking. We need to
make sure that these systems are safe and resilient.
The third issue is that while the Australian household sector has a high level of debt, it has also
built up substantial buffers. All up, the balances in mortgage offset accounts and redraw facilities
amount to 16 per cent of outstanding housing debt. This is equivalent to around 21⁄2 years of
required mortgage payments at current interest rates. It is important to recognise though that this
figure masks a lot of variation across households. We estimate that around a quarter of
households with a mortgage have either no buffer or a very small one.
Loan arrears remain low, although they have risen over recent years. Also, we estimate that for
almost 4 per cent of borrowers their current loan balance exceeds the value of their property.
Over half of these borrowers are in Western Australia where there has been a large and
persistent decline in housing prices. So this is an area that bears watching.
On a completely different matter, I would like to draw your attention to the fact that we will be
releasing the new $20 note next week, on 9 October. This note is printed here in Melbourne, at
our printing works in Craigieburn. I have brought along a few notes tonight hot off the presses for
you to have a look at.
I sometimes get asked why the Reserve Bank is replacing the existing series of banknotes,
especially when more of us are moving to electronic payments. People also wonder with
contactless payments now so ubiquitous, do we still need banknotes?
Given these questions, it might surprise you then to know that the demand for banknotes in
Australia is still strong. The stock of banknotes on issue, relative to the size of the economy, is
close to the highest it has been in 50 years. It is possible that low interest rates are part of the
story here. All up, there are 14 $100 notes on issue for every Australian, 30 $50s, and 7 $20s.
That makes for around $3000 worth of banknotes on issue for every Australian. I, for one, don't
have anywhere near that amount.
At the RBA, we have recently undertaken some work to understand the whereabouts of all these
banknotes. It is hard to know exactly, but we estimate that around a quarter are used to make
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legitimate day-to-day transactions within Australia. It also appears that between half and
threequarters are held as a store of value in safes, under beds and at the back of cupboards, both
here in Australia and elsewhere around the world. We estimate that a further 4 to 8 per cent are
used in the shadow economy, either to hide transactions from the tax office or to undertake illegal
transactions. Finally, it appears that between 5 and 10 per cent of banknotes are either simply
lost, maybe at the beach, or destroyed, perhaps in a natural disaster. So, as best we can tell,
that is where all the banknotes are.
One indicator of the decline in the use of banknotes for day-to-day transactions is the fact that
the value of cash withdrawals through ATMs has fallen by a quarter over the past decade.
Australians have clearly embraced the convenience of contactless payments. We are also
increasingly embracing payments through Australia's fast 24/7 payment system, the New
Payments Platform. If you have not already got your PayID to use the simple addressing feature
of this new system, I encourage you to get one. If your bank is not offering this new fast payment
service to you, I encourage you to ask them why. And if you are not happy with the answer, give
some thought to switching banks.
Before finishing I would like to return to the question of why we have been issuing a new series of
banknotes. The main answer is to keep ahead of the counterfeiters. We have long had one of the
safest and most secure currencies in the world. The level of counterfeiting in Australia is low and
declining, with around 15 counterfeits detected per million banknotes in circulation in recent
times. This compares with rates above 50 for some other major currencies. But the
counterfeiters don't stand still and we need to stay ahead. So we have added new high-tech
security features to the new banknotes so that they remain safe, secure and reliable. For those
of you who still use banknotes for your spending, it would be good to see a bit more use and
spending out there.
Finally, I would like to thank you again for joining us this evening. We are looking forward to
hearing directly from you about how things are going here in Victoria.
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For more information, see Finlay R, A Staib and M Wakefield (2018), 'Where's the Money An Investigation into
the Whereabouts and Uses of Australian Banknotes', RBA Research Discussion Paper No 2018-12.