 Good afternoon, everyone. It's a great pleasure for me to be able to be here and so and thank you for those comments When Ian McFarlane delivered the inaugural lecture in this series in 2002 He said and I quote any objective assessment of achievements would play so Leslie among the most distinguished Australians of the past century so for me, it's a great personal privilege to be able to honor his Contribution to the economics profession today, and it's a particular privilege to be able to do it under the mural here This mural was previously in the bank's office in Melbourne We sold that building last year and we were looking for home for this Mural and we couldn't have thought of a better place in the world for it to end up here at ANU where Nugget Coombs had a Very strong affinity with so thank you for taking our mural and it's a it's a particular honor to be able to speak underneath it Leslie Milfull as someone said had a long and close association with the Reserve Bank of Australia He was a member of the Reserve Bank board for most of the time between 1916 1975 And before joining the board he played a critical role in debates that shaped the mandate given to the Reserve Bank in 1959 It's now six decades since that mandate was passed by Parliament and it's more than stood the test of time So from this perspective alone, I think we have a lot to thank so Leslie for In today's lecture, I'd like to discuss two issues that Milfull had strong opinions on The first is the appropriate objectives of the central bank and the second is his view regarding the impossibility of zero interest rates Both of these issues have echoes in today's discussions of monetary policy So first central bank objectives over recent decades There's been much discussion in the academic and policy communities as to whether the central bank should have a single mandate That's price stability or a dual mandate price stability and full employment and in practice We see examples of both around the world Here in Australia though the Reserve Bank of Australia has neither a single nor a dual mandate We have a triple mandate which I have up here Under the legislation passed in 1959 It's the duty of the Reserve Bank Board to ensure that its policies are directed to the greatest advantage of the people of Australia So that we contribute to the stability of the currency of Australia The maintenance of full employment in Australia and the economic prosperity and welfare of the people of Australia This triple mandate was taken from earlier legislation passed in 1945 That set the objectives for the central bank division of the Commonwealth Bank This legislation had its origins in a post-World War two Australia when ensuring economic stability and higher levels of employment were very much top of mind Establishing such a broad mandate for the central bank ran against the conventional wisdom of the time Which was that central banking was just about currency and banking Indeed in his book on the history of the Reserve Bank Boris Shedman was moved to write and here I quote him This bold declaration of responsibility was a landmark in the history of central banking It was a landmark in the sense that the Australian Parliament Recognized that central banking was not just about money and finance But it was also about jobs and the welfare of our society and as the current Governor Reserve Bank of Australia I very much share this perspective Ultimately central banking is not only about finance and money Rather, it's about enhancing the economic welfare of the people we serve Primarily through achieving price and financial stability and maximum sustainable employment Melville had a very important hand in setting This direction for the institution that I now lead His contribution goes back to at least 1936 when he made a lengthy submission to the Royal Commission on the monetary and banking systems in Australia As you can see here the first sentence of that submission reads The ultimate purpose of monetary policy is to enable the economic system to achieve the optimum use of Available raw resources as far as as possible It was then 23 years later that this idea is slightly different words found expression in the Reserve Bank Act 1959 It's worth recalling though that Melville had less success in his quest for full employment To be incorporated into the charters of the global economic institutions that were set up after World War two The cell when says he was frequent a frequent Visitor to Washington the United States to set up these institutions And he was a strong advocate for what became known as the full employment approach He wasn't able to convince the international organizations, but his commitment to full employment was an enduring nature a during aspect of his his advocacy But back to the world of central banking Since the early 1990s the conventional wisdom has been that the best Contribution that a central bank can make to full employment and economic welfare is to maintain low and stable inflation This is because by keeping inflation under control and within a narrow range The central bank can reduce uncertainty and economic distortions and in so doing provide a stable foundation for people to make their decisions In turn this provide the basis for reaching the maximum sustainable level of employment That's if that is achievable given the choices that society makes about things such as the safety net The nature employment arrangements and training and education And for the high inflation of the 1970s and 1980s many central banks adopted an inflation target There's the means to deliver the sought-after low and stable inflation Central banking in many parts of the world became all about inflation control and adopting an inflation target became the way of delivering that control As part of this ship central banks also changed their communication to focus very much on inflation outcomes Accountability mechanisms were also developed to make sure that the central bank kept its focus squarely on inflation This approach made a lot of sense and it worked As you can see in this chart inflation rates have been lower and more stable since the adoption of inflation targeting Central banks have established strong anti-inflation credentials and expectations of high inflation have largely been rung out of the system Core inflation in the advanced economies has consistently been around 1 to 2 percent for the past 20 years and Measures of inflation expectations suggest that inflation is expected to remain low for many years to come Despite this success things have not exactly worked out as hoped and Recent experiences causing some rethinking of some aspects of the conventional wisdom and I'd like to draw your attention to two aspects of recent experience The first is that low and stable inflation is not a sufficient condition for financial stability and thus ultimately full employment Indeed it's possible in some circumstances a low and stable inflation Environment provides fertile ground for the emergence of financial stability risks And as we've seen too often a crystallization of these financial stability risk can have very large welfare Consequences with people losing their jobs their incomes and their savings So just achieving low and stable inflation is not enough to Maximize economic welfare The second aspect that I'd like to draw your attention to is That there is more uncertainty than there previously was about what is required to deliver short-run inflation control This partly reflects some powerful global forces including technology and increased competition from globalization These forces are affecting inflation dynamics almost everywhere So it is more difficult to manage inflation tightly than it once was In my view the Australian approach to inflation targeting Together with our broad mandate are better suited to this changing world than all more more rigid monetary policy arrangements In Australia since the early 1990s. We've had a flexible inflation target Our target is to achieve an average rate of inflation over time of between two and three percent This means that there is an acceptable degree of variation in inflation from year to year and we've been prepared to use this flexibility Our focus is very much on the medium term Hence on average and over time The board is seeking to provide a strong nominal anchor that people can rely on when making their decisions Most people in our society can cope with small variations in inflation from year to year But dealing with medium-term uncertainty is much more difficult Importantly, we've also always seen the inflation target as nested within the broader objective of welfare maximization This means that the question the Reserve Bank Board asks itself at every meeting when making interest rate decisions Is how those decisions can best contribute to the welfare of the Australian people? In particular, we are seeking to achieve the maximum sustainable rate of employment consistent with inflation being a target and We are seeking to do this in a way that limits the build-up of financial imbalances that can be the source of instability down the track And in doing this we can make a material contribution to the welfare of the society we serve I acknowledge that there is an element of judgment and discretion in this approach Certainly, there's more judgment involved in an approach to monetary policy that mechanically sets interest rates So the forecast inflation rate is at the target in two years or three years time My view is that our more flexible approach has served Australia well and It can more easily accommodate the changes that are taking place in the economic system than you can other approaches to monetary policy More generally, I also see longer-term benefits in terms of the standing of the central bank in the community If we explain our decisions not just in terms of inflation, but in terms of jobs and incomes That's not to say that inflation outcomes are unimportant because clearly they are Rather we need to remember that inflation control is a means to an end and That end is the maximization of the welfare of the society And I suspect that's a sentiment that Melville would have very much agreed with I want to emphasize that the discretion we have and our broad mandate to promote the economic welfare of the Australian people Do not constitute a license for the Reserve Bank Board to pursue or advocate economic policies outside our area of expertise Our focus is inflation control the labor market the payment system and financial stability And dealing with these matters is our contribution to economic welfare I also want to emphasize that the flexibility of our inflation target and our broad mandate and the discretion that allows us Requires a very high level of transparency and accountability from us When we make decisions there is always an element of judgment And we do have to wrestle with some difficult trade-offs where reasonable people can come to different judgments This means that you should expect us to explain our decisions very clearly You should also expect us to explain the various trade-offs we face and how we're balancing those trade-offs And as these trade-offs become more complicated in today's world of very low interest rates You should expect us to be clear as clear as we can about how we're viewing these trade-offs and how they're affecting our decisions So that brings me to my second topic and that's the very low level of interest rates around the world Reading through Melville's various writings It's pretty clear that he would have been very perplexed about the current state of affairs In particular the prevalence of zero and negative interest rates Writing in the economic record in 1938 Melville said zero interest is a limiting but unattainable value Analogous to infinity He went on to argue that the notion that a zero rate of interest is possible Assumes that there is a practical limit to the amount of useful material which can be profitably employed by society To reinforce this point he went on to write that at zero interest rates And here I quote Roads would be levelled and straightened regardless of cost In some places mountains would be dug away and valleys filled provide residential and agricultural land Deserts would be watered Beaches would be built in places accessible to cities And provided with artificial sea and sunlight I've been a strong advocate for infrastructure investment but I think some of these ideas stretch the imagination I found it surprising to read this not just because of the obvious engineering problems involved in some of these proposals But because in other writings Melville was very skeptical about public works and public debt Understandably he wanted public money to be spent wisely So his writings in this area were quite a contrast But it reflected his strong view that zero interest rates were any possibility Because at zero interest rates people would just borrow, invest and consume And satisfy all their wants So as I said he'd be perplexed about the current state of affairs As things currently stand the entire Swiss government nominal bond yield curve is in negative territory And you can see that in this chart Most of the German, Dutch, French and Japanese yield curves are also in negative territory The Swiss government for example can borrow for 30 years at an interest rate of minus 0.21% If it were to issue a zero coupon security at this yield It would mean that the buyer of the security would give the Swiss government 100 Swiss francs today And receive back just 100 Swiss francs in 30 years with no other payments over that 30 year period It's remarkable There have certainly been other periods in history where real bond yields have been negative But such widespread negative nominal yields is unprecedented and I think it's remarkable But it's not just governments that can borrow at negative yields Over recent times private companies including Coca-Cola, Orange and Siemens Have issued unsecured bonds with zero coupons and have negative yields It's also become common for European banks to issue covered bonds with negative yields And in Denmark at least one bank has offered residential mortgages at a negative interest rate Minus half a percent Although after fees the effect of interest rate is just in positive territory As you can see in this next chart there are now around US $14 trillion of bonds trading at negative yields Around the world remarkable And around a quarter of all government bonds on issue globally are now trading at negative yields Back in 1938 Melville would have struggled to understand this And today in 2019 many people also wonder how things could have come to this In the moment I will offer a few explanations Before I do so I want to point out that even back in 1938 Melville's views about zero interest rates were contested Following his article in the economic record Brian Redaway and Richard Downing Published a conflicting view with arguments that still have resonance today They pointed out that even at zero interest rates there is a limit to borrowing by both individuals and governments And that's because even if the interest rate is zero the principal does need to be repaid one day This means that projects undertaken with borrowed money still need to generate a return that's sufficient to repay the principal And also to compensate for the risk And I suspect that some of Melville's engineering ideas that I spoke about before wouldn't have met this test So how do we explain the very low level of interest rates right around the world Like many questions in economics a reasonable place to start is supply and demand Over recent times the global supply of savings has been high relative to the demand to use those savings to invest in new productive capital As a result the returns to savers especially people saving in low risk assets is low There's a lot of savings out there and not much demand for use the savings so the savers get low returns So the question is then why is the global appetite to save high Relative to the appetite to use those savings to invest in new productive capital I want to start with the saving side and then go through the investment side On the saving side I'll focus on three issues These are demographic trends the integration of Asia into the global economy and the legacy of high levels of borrowing in the past So first demographic trends As you can see globally there are some very large shifts taking place In particular population in many countries is aging rapidly and life expectancy is continuing to increase After rising for many decades the share of the global population that's aged between 15 and 64 is now declining And this declines expected to continue The United Nations estimates that average life expectancy has increased from just 55 years in 1970 to over 70 years now And this trend too is expected to increase While retirement ages have also increased as people live longer The increase in retirement age has been less than the increase in life expectancy So people are having to plan for more years in retirement And they're having to save more to finance those extra years in retirement A second important factor influencing global savings outcomes is the rise of Asia Asian countries now account for around one third of global GDP up from just 10% in the early 1980s People in Asia tend on average to save a fairly high share of their incomes This partner reflects the less extensive social safety net and the nature of the financial systems in Asia As incomes have risen in Asia average saving rates in the region have fallen a little But they remain higher than in most other parts of the world A third factor affecting savings outcomes in many countries is the higher level of borrowing in previous years While the experience differs across countries At the global level the stock of debt outstanding relative to GDP has steadily increased for the past 50 years And it's now at a record high The big shift has been in private debt particularly in the advanced economies But public debt has also trended higher over recent decades after declining following World War II One consequence of the high level of debt is that people are more careful with their spending And they're less inclined to take on yet more debt This is especially so when income growth is disappointed as it has over recent times In a number of countries both government and households feel constrained by their previous decisions to borrow And they're seeking to put their balance sheets on a sound of footing And one way they're doing this is by spending less and saving more So these are the some of the factors that are having major influences on global saving outcomes And now turn to the investment side of the equation This is important because you might recall that Melville you argued that at zero interest rates There would be an almost unlimited number of things to invest in Today's reality though is somewhat different Here again I'm going to point to 300 related factors The first is the high level of uncertainty The second is slower population growth And the third is some pessimism about future productivity growth It's well understood that there has been a high level of global economic policy uncertainty over recent times And this is evident in measures of policy uncertainty calculated from news stories in leading media outlets around the world You can see that here The sources of this uncertainty are well known The long list includes the trade and technology disputes between China and the United States The Brexit issue, the ongoing tensions in the Middle East The problems in Hong Kong and tensions between Japan and South Korea Not surprisingly these events are making businesses nervous And they're responding by putting off investment decisions Many would prefer to wait while some of the uncertainties are resolved before proceeding with costly investments It's understandable But as important as these geopolitical tensions are They're not the full story Businesses face a range of other significant uncertainties at the moment Including from the rapid pace of technology change Increased competition as a result of globalization And ongoing changes to regulatory arrangements It's probable that the uncertainties generated by these structural changes Are interacting and being amplified by the geopolitical issues In this context it's worth noting That despite the marked decline in interest rates Average hurdle rates of return for new investments in physical capital in many countries Have not changed that much It seems like there is a global norm for hurdle rates somewhere between 13 and 14% And it's hard to shift that norm Even at record low interest rates There are a couple of possible explanations for this The first is the reduction in the cost of borrowing Has been to offset the rise in the required risk premium Due to the uncertainties that I spoke about If this were so The hurdle rate would be unchanged Low or normal interest rates would just be compensating for the higher risk premium Leaving the hurdle rate unchanged The second possibility is that some firms have been slow to adjust to the new reality Of low interest rates We hear reports the hurdle rate of return of 13 to 14% Has been hardwired Into the corporate cultures in some companies And changing this hard wiring is difficult And it's time consuming However, from our liaison with Australian companies We do know that some firms have lowered the hurdle rates of return And this is opening up new opportunities for them And it would be good to hear more such reports over time My view is that there's an element of truth to both of these explanations Risk premiums are clearly risen And in some cases hurdle rates of return are too sticky And it would be good to see them come down A second explanation for the lower level of investment globally Is a slower rate of population growth Especially in the advanced economies In the late 1960s Population growth in the advanced economies Was running at around 1.2% a year Since then, as you can see, it's steadily declined And it's now running at just 0.4% And a number of countries in North Asia And in Europe have declining populations And other countries have forecast to join this group fairly soon Slower population growth means there's less need to add to the capital stock To accommodate more people There's home building and other buildings required And there's less need to invest in infrastructure To meet the needs of a growing population While there are some specific areas where more investment might be needed The overall effect of lower population growth Is to reduce investment A third explanation for lower investment demand Is that people are less optimistic about future economic growth The slower population growth is part of the story here But it's not the full story There's less optimism about future productivity growth as well One way of seeing this is in the shifting estimates The potential growth in the advanced economies In the mid 1980s Estimates of potential growth were clustered around 3% As you can see They're now clustered around half of this Similarly there's been a downward shift in estimates Potential growth in Asia Especially in China and South Korea With economies expected to grow less quickly Than in the past There's less incentive to invest So these are some of the main factors That are influencing saving and investment globally And in my view They largely explain why we have such low global interest rates But it's not the full story Central banks are also playing a role While our regular explanations of interest rate decisions Typically don't reference the broader structural factors That I've just spoken about These structural factors Are having a powerful influence On the setting of interest rates right around the world In addition Central banks have responded to the cyclical position By lowering interest rates And by buying very large quantities Of government and long term securities Before the financial crisis The central banks around the world Held only around 5% Of government debt on issue Today they hold nearly 30% In Japan The Bank of Japan holds almost 50% Of government securities on issue With these holdings equivalent to 80% Of Japanese GDP Again remarkable Another significant purchaser of government securities Over recent times has been pension funds Particularly in Europe As potential regulation has been strengthened The funds have purchased additional long dated assets To maturity match their long dated pension liabilities One way of seeing the effects Of these various purchases By central banks and pension funds Is in the term premium Normally when an investor Purchases a 10 year security A risk premium is earned Over and above the return that would be earned By rolling a short term investment Over the 10 years This premium has historically averaged Around 1.5% But it's now negative At minus 1% You get less for buying a long dated asset Than you would expect to earn From rolling a short dated one Again remarkable It's directly related to the purchase Of government securities by central banks And by others So this is an important part of the story too The main story is the structural factors That I spoke about Taking into account all these factors The key to a return To more normal interest rates globally Is to improve the investment climate While Melville turned out to be wrong About zero interest rates He was right in another sense At low interest rates Many investments that didn't make sense At higher interest rates Now make sense This is especially so for investments And payoffs Because future returns No longer need to be discounted as highly This means that low interest rates Give us the opportunity To lengthen our horizons And think about projects With really long term payoffs There are two central elements In improving the business investment climate The first is a reduction In some of the geopolitical And other risks that I talk about That have led to higher risk premiums And structural measures That give people confidence About future economic growth So that businesses are prepared To expand, invest and innovate Both of these elements Are largely beyond the control Of central banks There matters for government And for business So this is the environment In which the Reserve Bank Board Is setting interest rates It's a complicated environment With no responses of other central banks If we did seek to ignore these trends The exchange rate would most likely appreciate And the current environment That would be unhelpful In terms of jobs growth And achieving the inflation target It's important to point out though That while we need to take account Of these global forces There is no automatic Or mechanical link Between what's happening elsewhere In the world in their own monetary policy The Reserve Bank Board We're asking ourselves What is best for the Australian economy And for the welfare of the Australian people Over the course of this year As you know we've lowered interest rates Three times to a record low Of three quarters of one percent We're confident that these reductions Are helping the Australian economy And supporting a gentle turning point In economic growth In doing so low interest rates Are supporting jobs For all income growth At the same time though We recognise that monetary policy Is not working in exactly the same way That it used to We also recognise that low interest rates Hurt the finances of many people Particularly those relying on interest income So there's a balancing act here The Board is prepared to ease Monetary policy further if needed Having said that It's extraordinarily unlikely That low interest rates in Australia It is likely though that we will require An extended period of low interest rates To reach full employment And for inflation to be consistent With the target As is the case internationally though The focus needs to be on an improvement In the investment environment So that investors are prepared To take Melville's queue And use low funding costs To build new productive assets Not only would this help With a return to more normal interest rates But it would also be good For our collective welfare too Thank you very much for listening And I look forward to answering your questions Thanks very much For that very comprehensive And compelling lecture And I'm sure there'll be A number of questions We do have limited time So could I ask you to Keep the length of your questions Down to a minimum So we can maximise The number of questions asked There are microphones On Both aisles And could you Raise your hands If you have a question So the one Thank you My short history is that One year master of economics Of course that ended in 1991 Improving One of the anecdotes That I moved was Back in 1948 I think it was When Prime Minister Ben Chippley Chose Not accused to be The next Governor of the Commonwealth Bank Which then was a simple bank And Not it was I'm not to tell his friends That Norville Actually was better quality Of the job That sort of model sees a nice touch But I note that That not it actually Accepted the job And kept it familiar to me Ease Governor Lowell Thank you for your talk tonight I've been touring with you a little bit In Brisbane In Adelaide And in Armada In May, June and September On each of those occasions You've seen the signal That the Reserve Bank Was going to cut banks Next to Port Mead We're in Canberra tonight And there's a board meeting next week Should we be seeing signals Of another move next week Or is the Reserve Bank If the latter is the case I wonder if you could talk about The role of house prices In the amount of the policy process You know, for a long time We're told that Sharpe rising and home prices Were a bad thing And then the board home prices Were a bad thing In recent times There's been a sharp turnaround In home prices as Reserve Bank In fact, the five city House price index is up I'd like to know that's A double digit annualised rate gain And it looks like home prices Might go to a new level of highs Late next year Is that a good thing or a bad thing Or is that just part of the transition mechanism Of monetary policy? Well, there are a few issues there Today I was trying to steer Clear of any signals about Interest rates in the short term And trying to provide some perspective About the longer term factors That are really driving Longer term factors In mind As I said in my prepared remarks The board is prepared to cut interest rates Everything is in the collective welfare of Australia And we'll have to make that judgement As I said every single meeting And we'll have another meeting next week Where we have a discussion On housing prices I think it's undeniable that That's part of the transmission Of monetary policy Lower interest rates do push up asset prices And higher asset prices Do affect and people spend a bit more So that is part of the transmission mechanism Is it a problem? I don't think so Could it become a problem? I think only if housing credit growth Would have picked up a lot Now at the moment credit growth is modest Investor credit growth is still negative So the outstanding credit owed by investors Is still declining And credit growth to own occupiers Is only modest So that's our main focus Is on what's going on with credit growth Not with what's going on with the asset prices per se My name is Smott I'm a professor in the research school of economics Here at ANU And my comment The question is about The effect that zero interest rates Have on investment Which is not the same That's what we're talking about Now an investor Doesn't just think about interest rates Today Investor has to think about What happens to interest rates in the future So this part is about Inter-temporal Inter-temporal What happens to the interest rates We know that the interest rates are just zero Today This Will not have a very large effect on the basic model It all depends on expectations What happens to interest rates in the future I wonder whether you want to comment on that Inter-temporal aspect But at least if you take the market's view The markets are saying interest rates are going to stay low For a long period of time And that's why in Europe Ten-year interest rates are negative And the forward yield curve is negative For a very long period of time I think it's quite possible That's the world we end up living in Where interest rates globally are going to be very low For a long period of time Because the things that are driving global savings Are not going to go away quickly And unless there's a revitalization of investment Around the world There's going to be this elevated appetite To save and not much desire to invest So I think we're in for a protracted period Of very low nominal interest rates And we've got to change the saving investment Balance to change that Do interest rates affect investment In the short run I agree with you that don't have very much effect But lower interest rates Through giving people more money to spend In a small open economy by affecting the exchange rate Should increase aggregate demand And when aggregate demand picks up Firms need to invest more So there's an indirect channel But I also think there's Another important channel And that's through lowering the hurdle rates of return If you can invest And finance that investment Low interest rates That makes investments possible That were not feasible at higher interest rates And as I said in my remarks In country after country Business is still requiring 13 to 14% return on new physical capital And the reason we have Low growth and low interest rates Is because those returns are not achievable In the world we live in And many businesses I think need to make an adjustment To lower hurdle rates of return To go with the lower interest rates And that would help as well Does there a point in having to explain That the Commonwealth Bank Of only 7% of mortgage holders Actually reduced their mortgage payments After using interest rate cuts Is that number comparable to history Or is it quite a learning work And if it is a learning work Does it concern you And does it take away some of the rest Of the mortgage policy? I don't have a time series on Kind of a normal percentage of people Who cut their interest They cut their payments When interest rates go down Many people have borrowed a lot of money And their income growth is slow So it's not surprising When interest rates come down That they try and pay off the debt Because the real value of their debt Is not being eroded as quickly As it previously was Because their wage is not rising as quickly So they're having to make more of an effort To pay off the mortgages Not everyone's in that case But there seem to be a lot of people that are In the end though They might affect them to some monetary policy It may mean that the effect is a bit delayed But if people pay off their mortgages A bit more quickly Their balance sheets get to a position They're comfortable with more quickly Than they otherwise would have And then they start spending So I think it's quite possible That it delays the transmission Of monetary policy Thank you people at A&U No doubt teach long and variable lags And this is one of the reasons They teach long and variable lags In various episodes And we're probably in an episode Where it's taking a bit longer But I still think it works It's just long and variable And I was just wondering about What other people might say So when you think about saving This point of view One of the obvious Is that not everybody In the middle of an interview Should say the same thing And some people Are interested in the growing And the suggestion that Is quite important to say In some sense I think it might be a little bit delayed And you can see debates About that both in terms of technology And in terms of what governments They should do to go into any context So Any kind of future policy matters Do you think this is sort of Fair and fair people In terms of kind of global aggregate saving In Australia? I think it's no doubt It has had an impact on people's saving decisions And the income distribution Really it's kind of moved up and down Inequality's moved up and down But in recent times It hasn't really changed dramatically So I don't think you can argue That a big change in income distribution Is driving saving outcomes in Australia What's more important Is people are having to get used To slow growth in their nominal wages In Australia people used to have Wage rises of three and a half Or four percent a year That was the norm Now the norm for many people Is two or two and a half And numbers staying with three Not many people can aspire to at the moment And as that's gone on Year after year after year People are having to adjust Down their expectations of their permanent income And that's affecting their Saving investment decisions I think that's a much more important Use to our wages growing up Going up starting with a two Which as I've said on other occasions I think at ANU I think that's too low Because the inflation consistent rate Of wage growth in Australia Is close to three or three and a half We wanted to deliver you an average rate Of inflation at two and a half percent And I hope we get at least One percent labour productivity growth And workers get their normal share of that So two and a half Insistent rate of wage growth At the moment we're at two We're two and a bit I think that's a much bigger issue Than income inequality Question up at back Hello I'm from Sydney And I'm from Sydney And I'm here I was looking at what your thoughts were On our second Bishop's BlackRock paper Or one conditional That you brought it out into the mainstream The last four months It was actually just last month That Mario Draghi declared That the ECB government council Was actually zoning out The provincial policy Including the so-called one month review And the reforms actually That was actually set back in April But without endorsing So the one conditional My true idea is that we're now We're going to get there The prime minister Place inflation constraints Rather than solvency constraints With fiscal pausing And that We're going to be in crisis Because it's tend to be more destabilising Public sector deficits And those I was wondering what your thoughts Were now that there are simply Acts around the world that are Seeming to impact all the attention To some ideas that might not Have a lot of attention to the past Just to make sure That we're going to be able to Be able to build a brand And I've read that very carefully I think it's very interesting Really boils down I think what they're arguing Is really boils down to its fiscal Policy's job Because at some point That monetary policy can't stimulate The economy anymore And they say well a fiscal authority Can keep spending And it can be financed By the central bank And I don't want to comment on that Tonight You know there's a deeper question They raise kind of in some Circumstances Is there a case for coordinated Monetary and fiscal policy To stimulate the economy And at least conceptually I can think of circumstances Where that would be appropriate I mean if the economy were in A very difficult place With a sharp rise in unemployment And a little standard Of principal circumstances Where coordinated and fiscal Monetary policy would help We're a long way from those Circumstances in Australia And so it's really an issue of How much extra fiscal policy Support we should get And different people are going to Have different views on that here And I'd like to comment on Zero, one, seven, seven, five But the B9 supply Two, three, four, something more But we'd all like to see More competition, wouldn't we Probably just a few facts Are helpful here We've lowered the cash rate By 75 basis points The standard variable mortgage Rate has come down by 60 So 60 out of the 75 Has been directly passed through But what's happening every Single day out there And I encourage everyone in This room who's got a mortgage And many people are actually Getting better deals So the average mortgage rate Has come down in extra five basis points In the last three months Just because people are going And shopping and knocking on the door And say, if you don't give me a better deal I'm going to go to another bank So we're seeing people switching All the time And at the moment The average rate on new mortgages Is 30 basis points 0.300% below the average rate They're actually good deals And so there is actually competition there It's occurring for the new borrowers Or the people who are prepared to switch The people who are just prepared to Stay with the same old bank all the time And not knock on the door Are paying higher rates than they should And I encourage them to go and knock on the door The best thing we can do for competition Is for the people in this room And every other room around the country If they're unhappy with their mortgage rate To go and ask for a better one Then the banks will have to respond To your credit We want to talk about mortgages But what about credit cards And other forms of people Who are supposed to have a foreign debt? I don't really have a very good answer Credit card interest rates Are notoriously sticky They don't move very much at all I think the way that we get More competition here Is actually people go and force the banks To compete by complaining and switching But I Sorry, I didn't hear that I mean credit card interest rates Are sticky right around the wall They don't move very much And there are kind of particular Dynamics of the credit card market That kind of can lead to that outcome But I don't really have a good answer To that, I'm sorry Shannon, I have a question In regarding how can the RBA Continue to sort of foster Invested confidence Particularly in lowering interest rates Seems to be having more than one Of the same impact And perhaps anticipated And also taking into account That banks are necessarily Seem to be crossing over Full interest rates costs Well, how can we foster confidence? I think by being transparent About the challenges we face And acting consistent With our mandate and explaining To people what we're doing And how we're balancing the trade-offs There's a lot of discussion About the kind of incomplete pass-through And remember I just said 60 of the 75 has been passed through And if you take account of all the extra Switching that's going on all the time There's another five basis points That's 65 And if you take my advice And go and ask for a better deal I expect that over the next few months We'll see another five basis points So I can imagine 70 of the 75 But you know 70 out of 75 Is from my perspective It's reasonable We also need to remember That monetary transmission Isn't just about the mortgage rate It gets a lot of media coverage And the politicians are obviously Very interested in what happens to the mortgage rate But that's only one interest rate In the economy The rates that most businesses pay Come with the cash rate And people who are investing In Australian dollar securities They're worried about Wholesale rates And the Reserve Bank's cash rate So there's full kind of transmission On those channels I think broadly speaking The transmission is working reasonably well As I said in response to the other question The lags are long and variable One up the back And I think we better make this one the last I'm happy to take It's really up to you I'm happy to take a few more Two or three more I just wanted to say One of the questions asked the diagram For financial disabilities Can you just sort out those risks And how it works? Well in principle As I said in response to Rory's question I mean lower interest rates Can push up asset prices And we know in asset markets That rising prices can take on a life Of their own And we get bubbles developing I don't see a very high probability Of that at the moment Housing prices are going up But I don't see it particularly problematic You could have a financial stability Risk emerge if people start Borrowing a lot again If our incomes are only growing at 2% On average per person Borrowing starts rising much faster Than that I think we build up future vulnerabilities Which could be difficult In Europe There's a lot of concern About the effect of negative And low interest rates on the profitability Of the banking sectors Banks used to welcome having In Europe they used to welcome Having a lot of deposits on the balance sheet Rather than having to go to wholesale funding Because deposits were cheaper than wholesale funding But it's turning out now In Europe the deposits are an expensive form Of funding because the deposit rate Gets bounded at zero So banks are issuing Securities in the wholesale market At negative interest rates Are a costly form of funding So deposits are becoming a liability now Which is kind of unusual In the state of the world Things have tipped on their head So that's causing stress In the banking systems in Europe Particularly for banks that are Largely deposit funding Another issue that's Arising in Europe People are concerned About the many citizens Are concerned about the sustainability Of their pension arrangements In some countries with pension funds Earning negative returns Nominal pensions are having to be cut And the citizens are worrying That their pension might be cut And so they're having to save more again So the effect of negative interest rates Is complicated And pernicious in many ways So this is one reason I say it's extraordinarily unlikely We'll have negative interest rates in Australia I think the evidence is mixed On whether it's been a success Elsewhere Question here And then a little bit the last one Clean assistance Merits of any Interest rate cuts That's what you're writing You said You focus the only Any higher than it is now You're going to want to say That it was part of the school That the President know about I don't really want to run commentary On people who are commenting on me Well I think what I can say I feel confident The reductions in interest rates That we've had so far Have made a positive effect If we hadn't cut interest rates Think about where the currency would be It would be perhaps substantially higher And that would be bad for both Achieving the inflation target And for lowering unemployment And the fact that interest rates are lower Has put more money in the hands of people And gradually that gets spent Maybe not as quickly as it used to be But so those channels are still Working And I'm confident in the end We'll have more jobs And better income growth Because of the cuts in interest rates But as we move down further I think the interest rate cuts Are less effective I wouldn't agree with the fact that There's no positive benefit I think we'd still get some benefit And my board will have to judge Whether that's appropriate In the circumstances we face Certainly I don't think it's a constraint It's certainly a factor that it's Influencing the labour market outcomes And as I said In response to an earlier question The main challenge is to get wage growth And have that consistent With the inflation target So we've had Three years in a row Of employment growth of two and a half percent That's pretty strong The labour forces The population is only growing at 1.7% The population is growing at 1.7% The labour force is growing at 2.5% You would expect to get Substantial inroads Into the unemployment rate But over the three years The unemployment rate's hardly moved anywhere In the supply So the participation rate is Rising very strongly So it's proving quite hard To create a tight labour market And so wage growth isn't picking up And the other element that you referenced Is under-employment There's quite a lot of Under-employment And that's affecting wage dynamics The under-employment though Is really part-time workers Who want to work more hours And the Bureau of Statistics Asks people when they do the labour force survey If you're a part-time worker Do you want to work more hours? And the vast bulk of part-time workers Actually don't want to work more hours They're quite happy working part-time And happy with their hours But around 20% of the people Who work part-time want more hours And on average they want two days extra a week So that acts as kind of An extra pool of surplus labour So we're finding kind of Labour supplies rising quickly And of the people in the labour force There are a group of them Who want more hours So that's the issue you face How do you create a tight labour market Particularly when supply is very flexible And my board discusses that a lot Well I think we'll Finish up there On behalf of the audience And also on behalf of the ANU I want to thank Dr Lowe For a very stimulating Lecture And for Readily agreeing to Answer questions And So many questions of that I want to thank Professor Martin Richardson Thanks Martin for the work you've done Organising This lecture And also Michelle Burke Thanks Michelle Just reminding you that There are Available Outside out in the foyer there So again Thank you very much And I really forgot There's a packet of ANU souvenirs Thank you so much Thank you