guy debelle : perspectives on financial markets remarks by mr guy debelle, assistant governor ( financial markets ) of the reserve bank of australia, to the centre for international finance and regulation ( cifr ) forum, sydney, 20 november 2013. * * * i would like to make a few general points about the financial regulatory agenda. a number of the regulatory changes in financial markets have increased the price of financial intermediation and the provision of financial services generally. this has very much been the intent, and not, to re - use one of the most overused expressions around at the moment, an unintended consequence. the price of intermediation was too low before the crisis ; now it is higher. it was too low in the sense that risks were underpriced. these risks include liquidity risk and counterparty risk. reforms such as the basel iii liquidity reforms or the otc reforms are aimed at ensuring these risks are more appropriately priced. as financial institutions are adapting to these reforms, they are repricing many of the services they are providing to take fuller account of these risks. this repricing is gradually occurring only now in many cases and there is more to come. hence end users of these services are only now starting to see the impact of these reforms in the form of higher prices. as in many markets, when a price goes up, the quantity tends to go down. again, this is to be expected, and desired. it is not unintended. what is less clear is whether various regulations are having an impact on the market, above and beyond the effect caused by a higher price. the general aim is for the price element to do most of the work, but in some cases, regulations with a quantitative element are in place as a backstop. let me give as one example of this, the effect of regulation on dealer inventories of fixed income. liquidity regulation has caused some repricing in the market, with somewhat lower inventories, particularly of less liquid securities, as a result. so aspects of the regulation have increased the cost and you would expect that to increase the price of providing the service. in this case, that would be a wider bid - ask spread. in turn, you would expect that to lower turnover. conceptually, the leverage ratio sits there as a backstop limiting the overall size of institutions ’ balance sheets. whether it binds in practice depends on the structure of the whole balance sheet. given the general

the neutral global real interest rate. during the financial crisis, the neutral global rate fell and this has had an important influence on the setting of interest rates in all countries, including here in australia. if we had not lowered our interest rates as global rates fell, the australian economy would have grown by less and inflation would have been even lower than it turned out to be. the fact that there is a common element in interest rates, however, does not mean that interest rates need to move in lock - step with one another. countries with a floating exchange rate, like australia, still retain considerable flexibility to set interest rates based on their domestic considerations. we did not lower our interest rates to the extraordinarily low levels seen elsewhere after the financial crisis. our circumstances were different : we didn ’ t have a meltdown in the financial system and we experienced a very large cycle in commodity prices and mining investment. just as we did not move in lock - step on the way down, we don ’ t need to do so in the other direction. it ’ s understandable that some other central banks are raising rates. they lowered their rates by more than us and, in a number of countries, the unemployment rate is now below conventional estimates of full employment at a time when above - trend growth is expected. our circumstances are a little different. we are still some way from what could be considered full employment and our central scenario for inflation is for it to remain below the midpoint of the medium - term target range for the next couple of years. we expect, though, to make further progress in reducing unemployment and having inflation return to the midpoint of the target range. if we do make that progress, at some point it will be appropriate for interest rates in australia to also start moving up. so, given recent developments in australia and overseas, it is likely that the next move in interest rates in australia will be up, not down. if this is how things play out, the likely timing will depend upon the extent and pace of the progress that we make. as i have discussed, while we do expect steady progress, that progress is likely to be only gradual. given this, the reserve bank board does not see a strong case for a near - term adjustment in monetary policy. it will of course keep that judgement under review at future meetings. i hope that these remarks this evening have helped you understand the australian economy, our opportunities and some of the challenges we face. i look forward to