Tag Archives: Philip Lowe

Philip Lowe: Opening remarks at the Melbourne Business Analytics Conference

Good morning and welcome to this year’s Business Analytics Conference.

I am very pleased to be able to join you, not least because of the theme of this year’s conference: Driving Recovery and Growth through Data Analytics. This theme brings together 2 issues that are very close to my heart – the recovery of the Australian economy from the pandemic and the critical role that investment in IT and data can play in sustaining that recovery. So I congratulate you on your choice of topic and I look forward to hearing your ideas.

The challenges facing us all are large. At the Reserve Bank, we are seeking to support the economic recovery and a stronger labour market that is consistent with achieving the inflation target. And most of you at this conference are seeking to find new ways of using data to help businesses and organisations innovate, compete and succeed.

These challenges are complementary. We will each be more successful if the other is successful. A stronger economy will provide businesses with the confidence and the resources to make the investments that are needed for our future. And conversely, our economy will be stronger because of your work, since the best decisions are those based on data, evidence and analysis. So our causes are linked.

I will come back to this idea, but first a few words about the economic recovery.

As a nation, we have responded very well to the pandemic. Australians have pulled together and been prepared to do what is necessary to contain the virus and support one another. Businesses have adapted quickly and innovated, with many making more progress on the digital front in a matter of months than they would have made in years. Governments also responded quickly and decisively, with extensive income support, increased spending on infrastructure and a large wage subsidy program. And monetary policy has also helped, reducing the cost of borrowing to historically low levels and supporting the supply of credit.

The result has been a quicker and stronger economic recovery than was expected. In the December quarter, GDP increased by 3.1 per cent and we are now within striking distance of the pre-pandemic level of GDP. The number of people in jobs has also almost returned to the level before the pandemic. Looking across the range of indicators, Australia is doing much better than most other advanced economies.

This, however, does not hide the fact that we still have a long way to go. The unemployment rate of 6.4 per cent is too high and the economy is operating well short of its capacity. Inflation and wages growth are also both lower than we would like. While we are expecting further progress to be made towards full employment and the inflation target, it is going to take some time before we reach our goals.

One piece of the recovery that is yet to click into gear is business investment. Understandably, last year many firms deferred their investment plans and sought to reduce risk on their balance sheets. Late in the year there was a welcome pick-up in investment in machinery and equipment, but there is still a long way to go to get back to the level of investment before the pandemic, which itself was low by historical standards. If we are to have a strong and durable recovery, it is important that the recovery in business investment continues and broadens.

Looking across the economy, there are investment needs and opportunities in many areas. The one I would like to focus on today is investment in IT, digitisation and data science. Investment in these areas is critical to lifting our nation’s productive capacity.

In many ways data is the new oil of the 21st century. Investing in data and our digital capability are critical to our future prosperity. These investments allow better decision making and a faster response to the changes in our economy and society. These investments are also crucial to organisations delivering the more personalised goods and services that many people are seeking.

There are opportunities for digital innovation in every sector of our economy. Almost every organisation needs a strong digital capability to perform well, to innovate and lift their productivity. Technology and data analysis also hold the keys to solving many of the great challenges of our times, including controlling the pandemic, dealing with climate change and responding to increasing cyber threats. This all means that the discussions you are having at this conference are really important.

If, as a nation, we are to capitalise on your work and the growing opportunities, we need to keep investing in the skills and knowledge of our people. This conference is a good example of this investment. Developing a strong digital workforce with skills in areas like predictive analytics, machine learning and artificial intelligence is just as important as investing in the hardware and software needed to support the digital economy. As part of our journey we also need to think about how our organisations function and make decisions, so that our people can work in more agile and flexible ways as they grapple with complex problems. It is by investing in both physical and human capital that we can boost our productivity, create employment and drive Australia’s future prosperity.

The importance of investing in the digital economy has been recognised by our governments. The Australian Government has a strong focus on this and is making additional investments in skills and training, streamlining regulatory processes and strengthening the nation’s cyber security. The consumer data right, to give consumers greater access to and control over their data, will also help. This access has started with open banking, which will make it easier for Australians to switch between financial institutions and access financial products that better suit their needs. In time, Australians will benefit from this being extended to other areas.

At the RBA, we are also investing significantly in digital infrastructure and data. The importance of this to us is reflected in the decision to make ‘harnessing the power of data’ one of our internal strategic focus areas for the next few years.

We view data as a strategic asset, and are investing in the processes, technology and people to enhance the value we get from data. We have established an enterprise data office with responsibility for data management, for ensuring that our staff have the right skills and that we are using leading data technologies and methods in our analysis. This includes the use of machine learning and ‘big data’.

We are seeing the benefits from this focus on data in our analysis of the economy and financial system. For example, the Bank’s staff use loan-level large datasets from securitisations to better understand developments in the market for housing loans and use detailed settlement data to measure bond market liquidity. They also use machine learning techniques to extract measures of sentiment from news articles as an economic indicator.[1] And during the pandemic, we have been able to access and analyse a broader range of data to obtain real-time readings of economic conditions in a way that wasn’t possible in the past.

At the RBA, we also see the power of new technologies and data in our central banking operations. The RBA has played a significant role in building the New Payments Platform (NPP), a critical piece of national infrastructure, which enables us all to make fast payments on a 24/7 basis. As a provider of banking services to the Australian Government, the RBA has been working with its government banking clients as they modernise their payment systems using the NPP. As an example, Services Australia now routinely uses the NPP to make emergency welfare and disaster relief payments in real time to Australians in need. Payment messages through the NPP can also carry richer data, opening up opportunities for more efficient business processes and new digital services in the future. As an example of this, NPP will be able to support the adoption of e-invoicing, which will lower the cost of doing business.

Another example where technology and data are opening up new possibilities is in the area of digital currencies. The RBA is conducting research on the technologies and policy implications of a potential wholesale central bank digital currency. This could use distributed ledger technology to support the settlement of transactions in the interbank payment system. Some of this work is taking place in the RBA’s in-house Innovation Lab, where we are collaborating with external parties on a proof-of-concept. We look forward to sharing more details in due course.

The Bank and the Payments System Board are also strongly supportive of forms of digital identity that can be used in both the public and private sector. An effective system of digital identity is important in promoting competition, security and innovation in the digital economy. The Australian Government is also supporting digital identity services for conveniently and securely accessing government services online.

I would like to conclude by returning to the idea that the challenges facing the RBA and those of you attending this conference are complementary.

The RBA is doing what it can to support the recovery from the pandemic and will maintain that support until we have achieved our goals for full employment and inflation. A strong economy will make for a more conducive environment for investments in data and technology. Similarly, your investments in data, technology and human capital will help make the economy stronger and more dynamic. We need these investments to develop the industries of the future and to equip Australians with the skills needed for that future. Australia needs your ideas, your ingenuity and your energy so that organisations across our country can seize the opportunities that will help deliver our future prosperity.

I wish you the best for the conference and look forward to your insights on how we can best drive the recovery and growth through investment in data analytics.

Thank you.

Statement by Philip Lowe, Governor: Monetary Policy Decision

At its meeting today, the Board decided to maintain the current policy settings, including the targets of 10 basis points for the cash rate and the yield on the 3-year Australian Government bond, as well as the parameters of the Term Funding Facility and the government bond purchase program.

The outlook for the global economy has improved over recent months due to the ongoing rollout of vaccines. While the path ahead is likely to remain bumpy and uneven, there are better prospects for a sustained recovery than there were a few months ago. Global trade has picked up and commodity prices have increased over recent months. Even so, the recovery remains dependent on the health situation and on significant fiscal and monetary support. Inflation remains low and below central bank targets.

The positive news on vaccines together with the prospect of further significant fiscal stimulus in the United States has seen longer-term bond yields increase considerably over the past month. This increase partly reflects a lift in expected inflation over the medium term to rates that are closer to central banks’ targets. Reflecting these global developments, there have been similar movements in Australian bond markets. Changes in bond yields globally have been associated with volatility in some other asset prices, including foreign exchange rates. The Australian dollar remains in the upper end of the range of recent years.

In Australia, the economic recovery is well under way and has been stronger than was earlier expected. There has been strong growth in employment and a welcome decline in the unemployment rate to 6.4 per cent. Retail spending has been strong and most of the households and businesses that had deferred loan repayments have now recommenced repayments. The recovery is expected to continue, with the central scenario being for GDP to grow by 3½ per cent over both 2021 and 2022. GDP is expected to return to its end-2019 level by the middle of this year.

Wage and price pressures are subdued and are expected to remain so for some years. The economy is still operating with considerable spare capacity and the unemployment rate remains higher than it has been for some years. Further progress in reducing spare capacity is expected, but it will be some time before the labour market is tight enough to generate wage increases that are consistent with achieving the inflation target. In the central scenario, the unemployment rate will still be around 6 per cent at the end of this year and 5½ per cent at the end of 2022. In underlying terms, inflation is expected to be 1¼ per cent over 2021 and 1½ per cent over 2022. CPI inflation is expected to rise temporarily because of the reversal of some COVID-19-related price reductions.

The current monetary policy settings are continuing to help the economy by keeping financing costs very low, contributing to a lower exchange rate than otherwise, and supporting the supply of credit and household and business balance sheets. Together, monetary and fiscal policy are supporting the recovery in aggregate demand and the pick-up in employment.

Lending rates for most borrowers are at record lows and housing prices across Australia have increased recently. Housing credit growth to owner-occupiers has picked up, but investor and business credit growth remain weak. Lending standards remain sound and it is important that they remain so in an environment of rising housing prices and low interest rates.

The Bank remains committed to the 3-year yield target and recently purchased bonds to support the target and will continue to do so as necessary. Also, bond purchases under the bond purchase program were brought forward this week to assist with the smooth functioning of the market. The Bank is prepared to make further adjustments to its purchases in response to market conditions. To date, a cumulative $74 billion of government bonds issued by the Australian Government and the states and territories have been purchased under the initial $100 billion program. A further $100 billion will be purchased following the completion of the initial program and the Bank is prepared to do more if that is necessary. Authorised deposit-taking institutions have drawn $91 billion under the Term Funding Facility and have access to a further $94 billion. Since the start of 2020, the RBA’s balance sheet has increased by around $175 billion.

The Board remains committed to maintaining highly supportive monetary conditions until its goals are achieved. The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market. The Board does not expect these conditions to be met until 2024 at the earliest.

Statement by Philip Lowe, Governor: Monetary Policy Decision

RBA Board decided to maintain the targets of 10 basis points for the cash rate and the yield on the 3-year Australian Government bond, as well as the parameters of the Term Funding Facility. It also decided to purchase an additional $100 billion of bonds issued by the Australian Government and states and territories when the current bond purchase program is completed in mid-April. These additional purchases will be at the current rate of $5 billion a week.

The outlook for the global economy has improved over recent months due to the development of vaccines. While the path ahead is likely to remain bumpy and uneven, there are better prospects for a sustained recovery than there were a few months ago. That recovery, however, remains dependent on the health situation and on significant fiscal and monetary support. Inflation remains low and below central bank targets.

In Australia, the economic recovery is well under way and has been stronger than was earlier expected. There has been strong growth in employment and a welcome decline in the unemployment rate to 6.6 per cent. Retail spending has been strong and many of the households and businesses that had deferred loan repayments have now recommenced repayments. These outcomes have been underpinned by Australia’s success on the health front and the very significant fiscal and monetary support.

The recovery is expected to continue, with the central scenario being for GDP to grow by 3½ per cent over both 2021 and 2022. GDP is now expected to return to its end-2019 level by the middle of this year. Even so, the economy is expected to operate with considerable spare capacity for some time to come. The unemployment rate remains higher than it has been for the past 2 decades and while it is expected to decline, the central scenario is for unemployment to be around 6 per cent at the end of this year and 5½ per cent at the end of 2022.

Wage and price pressures remain subdued. The CPI increased by just 0.9 per cent over the year to the December quarter and wages (as measured by the Wage Price Index) are increasing at the slowest rate on record. Both inflation and wages growth are expected to pick up, but to do so only gradually, with both remaining below 2 per cent over the next couple of years. In underlying terms, inflation is expected to be 1¼ per cent over 2021 and 1½ per cent over 2022.

In addition to the central scenario, the Board considered upside and downside scenarios related to the virus and the rollout of vaccines. Disappointing news on the health front would delay the recovery and the expected progress on reducing unemployment. On the other hand, it is possible that further positive health outcomes would boost consumer spending and investment, leading to stronger growth than is currently expected. An important near-term issue is how households and businesses adjust to the tapering of some of the COVID support measures and to what extent they will use their stronger balance sheets to support spending.

Financial conditions remain highly accommodative, with lending rates for most borrowers at record lows and asset prices, including housing prices, mostly increasing. Housing credit growth to owner-occupiers has picked up recently, but investor and business credit growth remain weak. The exchange rate has appreciated and is in the upper end of the range of recent years.

The Board remains committed to maintaining highly supportive monetary conditions until its goals are achieved. Given the current outlook for inflation and jobs, this is still some way off. The current monetary policy settings are continuing to help the economy by lowering financing costs for borrowers, contributing to a lower exchange rate than otherwise, supporting the supply of credit needed for the recovery and supporting household and business balance sheets. The decision to extend the bond purchase program will ensure a continuation of this monetary support.

To date, authorised deposit-taking institutions have drawn $86 billion under the Term Funding Facility and have access to a further $99 billion. The Bank has bought a cumulative $52 billion of government bonds issued by the Australian Government and the states and territories under the bond purchase program. It has not purchased bonds in support of the 3-year yield target since early December. Since the start of 2020, the RBA’s balance sheet has increased by around $160 billion.

The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market. The Board does not expect these conditions to be met until 2024 at the earliest.

RBA Minutes of the December Monetary Policy Meeting

Members participating

Philip Lowe (Governor and Chair), Guy Debelle (Deputy Governor), Mark Barnaba AM, Wendy Craik AM, Ian Harper AO, Steven Kennedy PSM, Allan Moss AO, Carol Schwartz AO, Catherine Tanna

Others participating

Luci Ellis (Assistant Governor, Economic), Christopher Kent (Assistant Governor, Financial Markets), Tony Richards (Head, Payments Policy Department)

Anthony Dickman (Secretary), Ellis Connolly (Deputy Secretary), Alexandra Heath (Head, International Department), Bradley Jones (Head, Economic Analysis Department), Marion Kohler (Head, Domestic Markets Department)

Michele Bullock (Assistant Governor, Financial System), for the paper on the future of money

International economic developments

Members commenced their discussion of the global economy by noting that some potential COVID-19 vaccines were reported as having a high efficacy rate and were nearing approval for emergency use in the United States, United Kingdom and the European Union. It was noted that should these vaccines prove effective in practice and be made widely available on a timely basis, this would reduce downside risks to the medium-term economic outlook.

Nevertheless, infections had risen notably in a number of large advanced economies since September. Hospitalisation rates had exceeded earlier peaks in many countries, and stress was being placed on some healthcare systems. Many governments had responded by tightening containment measures, including the re-introduction of full or partial lockdowns. This had contributed to a welcome reduction in the flow of new cases in Europe in recent weeks, while in the United States, where restrictions had been less stringent, numbers of new cases were yet to slow appreciably.

Members noted that global economic activity had bounced back faster than anticipated in the September quarter, but the tightening in containment measures in the December quarter had resulted in a loss of economic momentum. In Europe, some economies were now expected to contract in the December quarter. Members observed that, once most restrictions were lifted, the level of GDP in many economies had tended to recover to around 4 to 5 per cent below pre-pandemic levels. This sizeable shortfall reflected the remaining restrictions on some services industries as well as risk aversion and cost-cutting by firms, which had weighed on employment and investment.

In Asia, differences in the industry composition of economies explained some of the variation in recovery paths. Economies with large automotive industries had experienced a slower recovery in industrial production, compared with those whose exports of technology and electronics are more important. It was also noted that the composition of fiscal stimulus in China had contributed to the very strong rebound in industrial production there.

Members noted that housing prices in a number of advanced economies had been surprisingly resilient this year, and some economies had seen a notable increase in housing prices in recent months. New Zealand had experienced strong ongoing housing demand from population growth, expatriate buying interest and an earlier easing in lending standards. By comparison, these factors had been less relevant in Australia and, partly as a result, the increase in housing prices in Australia this year had been considerably smaller than in a number of other advanced economies.

Members discussed how global developments had affected Australian trade since the pandemic. Early in the pandemic, weak external demand had depressed exports, while supply disruptions had affected imports (as they had in a number of economies). The imposition by Chinese authorities of import bans and other obstacles to imports of some Australian products, particularly agricultural products and, more recently, coal, had also had an effect. However, it was also noted that Chinese demand for Australian iron ore exports remained firm.

Domestic economic developments

Turning to the domestic economy, members noted that the recovery had established reasonable momentum, aided by the lifting of restrictions in Victoria. Expectations for GDP growth in the September and December quarters had been upgraded over the preceding month, and employment had also recovered faster than anticipated. At the same time, members noted that there continued to be a significant amount of spare capacity in the labour market and the economy more generally. The recovery was still expected to be uneven and protracted, with inflation remaining low. Substantial policy support would therefore be required for a considerable period.

In reviewing recent data, members noted that the rebound in household consumption was well under way and evolving broadly as expected following a record contraction in the June quarter. A bounce-back in spending in Victoria had assisted this, consistent with more consumption possibilities opening up in that state. Indicators such as retail trade, new car sales and payments information indicated that the recovery in consumption would continue in the December quarter; high household savings was also likely to support consumption in the period ahead. At the same time, the ability of households to consume some services would continue to be constrained by pandemic-related restrictions. By the end of the year the level of consumption was still expected to be lower than a year earlier, in line with the experience of some other economies.

Members noted that conditions in the domestic housing market were improving but uneven. Regional housing prices had increased by more than those in capital cities since the onset of the pandemic. There was also considerable variation in changes in housing prices across the capital cities, with conditions in Sydney and Melbourne more subdued than elsewhere in the country. In addition, within Sydney and Melbourne in particular, conditions in the detached housing market were firmer than for higher-density markets. Overall, national housing prices had increased only a little since the outbreak of the pandemic.

Members agreed that an important factor in national housing market conditions had been the slowdown in population growth as a result of the closure of international borders; this had been more consequential in Australia than in many other economies. Members discussed how the decline in net overseas migration had affected conditions in the rental market in particular, with rents falling and rental vacancy rates in inner-city Sydney and Melbourne around their highest levels in many years. Rental vacancy rates were much lower in Perth, where growth in new supply had been relatively modest in recent years and international students accounted for a smaller share of rental housing demand.

Members noted that the recovery in the labour market was more advanced than expected, with employment having grown strongly in October. This was despite a tapering in the JobKeeper program and some restrictions on activity remaining in place in Melbourne during most of the month. Victoria accounted for around half of nationwide employment growth in October, in part because of the pick-up in employment in construction and manufacturing in that state as restrictions began to be eased. Related to the stronger employment outcomes, members also noted that the rebound in the participation rate had been surprisingly swift.

Despite these positive developments, members noted that the unemployment rate had ticked up in recent months and that broader measures of labour underutilisation remained high. Hours worked were around 4 per cent lower than before the pandemic, and many employed workers were still on reduced or zero hours. The recovery in employment and average hours worked for full-time workers had been much more subdued compared with those working part time. Members agreed that, on the whole, there was still a significant amount of spare capacity in the labour market and that this would remain a key policy challenge for some time.

A further indication of spare capacity in the labour market was low wages growth. Members noted that growth in the wage price index slowed to 0.1 per cent in the September quarter to be just 1.4 per cent in year-ended terms. This was the slowest wages growth in the two-decade history of the series. Over recent quarters, the slowdown in growth in wages set in individual agreements largely reflected wage freezes for many private sector employees and some, mostly temporary, wage reductions. The slowdown in award wages growth in the September quarter had been even more pronounced than in individual agreements, in part reflecting deferred increases for many awards. Members also observed that if new collective agreements (mostly enterprise bargaining agreements) were established at lower rates of growth than expiring agreements, this would place further downward pressure on wages growth. It was noted that a substantial tightening in the labour market would be required to lift wages growth and inflation outcomes over the medium term.

Members noted that non-mining business investment was expected to have declined further in the September quarter and the outlook remained weak. Surveys of businesses’ investment intentions indicated that expenditure on machinery and equipment and on non-residential construction would remain weak, although not as weak as expected a few months earlier; investment in machinery and equipment would have declined further in the absence of policy measures designed to encourage some firms to bring forward investment. Members discussed the risk that a prolonged period of weak capital investment could weigh on the economy’s productive capacity over time.

Members concluded their discussion of domestic economic conditions by noting that the unprecedented degree of fiscal and monetary policy stimulus since the outbreak of the pandemic had played a key role in supporting the economy. As part of the national fiscal response, state and territory governments had recently announced welcome additional increases in expenditure; this, combined with lower revenues, had seen the consolidated state and territory budget deficit for 2020/21 increase to around 5 per cent of output. The consolidated deficit across the Australian and state governments in 2020/21 was expected to be around 15 per cent of GDP, a substantial increase from 2019/20. Members agreed that national fiscal settings will provide significant support to the recovery in the period ahead.

International financial markets

Members observed that financial conditions were highly accommodative globally. News of progress in developing effective vaccines had boosted equity markets and had lowered credit risk premiums further during November, notwithstanding rising COVID-19 case numbers and tighter lockdown measures in many jurisdictions.

In the advanced economies, expectations for any further reductions in central banks’ policy rates had been scaled back, partly because of upward revisions to the economic outlook and partly because other policy tools were providing significant stimulus and could be scaled up if needed. At its most recent policy meeting, the US Federal Reserve had judged that immediate adjustments to the pace and composition of its asset purchases had not been necessary. The European Central Bank had signalled that it was likely to expand some of its programs at its upcoming meeting, but a further reduction in its negative policy rate was no longer anticipated by market participants. The Bank of England had announced an expansion of its asset purchase program in November and the Reserve Bank of New Zealand had introduced a program for providing long-term loans to banks. In contrast to previous months, market pricing had suggested that negative policy rates were unlikely to be adopted in either of these two economies.

Yields on long-term government bonds in the advanced economies had risen a little in response to the positive news on COVID-19 vaccines, but had remained at very low levels. Central bank bond buying programs had provided some offset to the effect on yields stemming from other influences, including the ongoing high level of government bond issuance. Members noted that, relative to GDP, the size of the Bank’s balance sheet was at the lower end of the range observed in other countries, although it was now rising steadily under the bond purchase program that had commenced in November.

Members noted that a range of asset prices had been supported by the more positive global outlook and the very accommodative stance of monetary policy. Spreads between corporate and government bond yields had narrowed further. Globally, equity prices had increased strongly following the vaccine developments, rising by at least 10 per cent in many cases, including in Australia. A reduction in uncertainty following the outcome of the US election, and better-than-expected earnings reports in advanced economies, had also supported equity prices.

Chinese government bond yields had increased and the Chinese renminbi had appreciated in recent months. Relatively higher interest rates and China’s recent inclusion in some global benchmark indices had encouraged continued inflows into Chinese bond markets. Also, Chinese authorities had continued to improve foreign access to these markets. Reflecting the better outlook for global growth and trade, many emerging market economies had experienced significant portfolio inflows and appreciating exchange rates.

The US dollar had depreciated during November in response to the improved medium-term outlook for global growth; on a trade-weighted basis it was a little below its level at the start of 2020. The same factors had supported commodity prices and seen the Australian dollar appreciate in November; on a trade-weighted basis the exchange rate had remained around 2 per cent below its peak in early September.

Domestic financial markets

Members noted that the most recent policy package had been working as expected. Money market rates had declined to be close to zero and the yield on the 3-year Australian Government bond had fallen to levels consistent with the Board’s target, aided by the Bank purchasing $5 billion of that bond in November. In addition, $19 billion of longer-dated government bonds had been purchased under the bond purchase program.

The bond purchase program had put downward pressure on bond yields and contributed to a lower exchange rate than otherwise. Yields on 10-year Australian Government Securities (AGS) had declined relative to 10-year government bond yields in other advanced countries in anticipation of the Bank’s bond purchase program. Since the announcement of the program, yields on 10-year AGS had remained at similar levels to those on 10-year US Treasury securities. The spread of semi-government bond yields relative to AGS had increased a little following the release of the state government budgets, but yields had remained at historically low levels. The markets for AGS and semi-government debt had continued to function smoothly.

Members observed that average outstanding interest rates on housing and business loans had declined to historic lows. Since the start of November, announcements of reductions in borrowing rates had largely been for fixed-rate housing loans as well as business loans under the Government’s Coronavirus Small and Medium Enterprises Guarantee Scheme. Some banks had also reduced rates on a range of deposit products.

Demand for housing finance had increased in recent months, particularly for loans to owner-occupiers, and credit to investors had stopped declining. Members noted that, in contrast, demand for business credit had remained weak and business credit had declined since May, unwinding the increase over March and April, when businesses had drawn on credit lines for precautionary reasons. Payments into offset and redraw accounts had remained high in October.

The future of money

Members considered a special paper on the future of money and changes in the way payments are made. They discussed the longer-term trend towards the use of electronic payment methods by households and the apparent acceleration in this trend as a result of the pandemic. Members noted that the shift from cash to electronic payments is further advanced in Australia than in a number of other countries. However, demand for cash as a store of value had continued to grow in Australia and most other advanced economies.

Members discussed different possible design features for a retail central bank digital currency (CBDC) and the associated public policy issues. They noted that there has been significant innovation in the Australian payments system in recent years, including the provision of real-time account-to-account payments that are available on a 24/7 basis. A retail CBDC might assist with some particular use cases, but it could fundamentally change the structure of the financial system and introduce new financial stability risks. It therefore did not appear that a public policy case for a retail CBDC currently existed in Australia. Members noted that there could be stronger arguments in favour of a wholesale CBDC and that it was important for the Bank to continue to conduct research in this area and monitor developments in other jurisdictions.

Considerations for monetary policy

In considering the policy decision, members observed that the global outlook remained uncertain. Infection rates had risen sharply in Europe and the United States and the recoveries in these economies had lost momentum or even reversed. However, the news about vaccines had been positive, which should support the recovery of the global economy. The recovery was also dependent on ongoing support from both fiscal and monetary policy. In labour markets in most countries, hours worked were noticeably below pre-pandemic levels. Inflation remained very low and below central bank targets.

In Australia, the economic recovery was under way and recent data had generally been better than expected. Consumer spending had risen as restrictions were eased, business and consumer confidence had lifted and housing markets had generally proved resilient. Employment had been recovering strongly and the peak in the unemployment rate was likely to be lower than the 8 per cent rate expected a month earlier. Nevertheless, the recovery was still expected to be uneven and protracted, and it remained dependent on significant policy support and favourable health outcomes. It would take some time for output to reach its pre-pandemic level and an extended period of high unemployment was in prospect. The high unemployment rate and excess capacity across the economy more broadly were expected to result in subdued wages growth and inflation over coming years. Given this environment, the Board viewed addressing the high rate of unemployment as an important national priority.

Following the significant policy changes made at the Board’s recent meetings, members decided to maintain the existing policy settings. Members agreed that the Board’s policy measures had lowered interest rates across the yield curve, which was assisting the recovery by: lowering financing costs for borrowers; contributing to a lower exchange rate than otherwise; and supporting asset prices and balance sheets. The Term Funding Facility (TFF) was also supporting the supply of credit to businesses. The Board’s decisions were complementary to the significant steps taken by governments in Australia to support jobs and economic growth.

Since the start of the year, the Bank’s balance sheet had increased by around $130 billion. Authorised deposit-taking institutions had drawn down $84 billion of low-cost funding through the TFF and had access to a further $105 billion under the facility. Over the preceding month, the Bank had purchased $19 billion of government bonds under the bond purchase program and a further $5 billion of AGS in support of the 3-year yield target. The Bank remained prepared to purchase bonds in whatever quantity required to achieve the 3-year yield target. Members noted that the Australian banking system, with its strong capital and liquidity buffers, had remained resilient and was helping the economy traverse the current difficult period.

Given the outlook for both employment and inflation, members acknowledged that monetary and fiscal support will be required for some time. The Board remains committed to not increasing the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, wages growth would have to be materially higher than recent levels. This would require significant gains in employment and a return to a tight labour market. Given the outlook, the Board does not expect to increase the cash rate for at least 3 years. The Board remains of the view that it would be appropriate to remove the yield target before the cash rate itself were increased.

Members agreed to keep the size of the bond purchase program under review. At its future meetings, the Board will closely monitor the effects of the bond purchases on the economy and on market functioning, as well as the evolving outlook for jobs and inflation. The Board is prepared to do more if necessary.

The decision

The Board reaffirmed the existing policy settings, namely:

  • a target for the cash rate of 0.1 per cent
  • an interest rate of zero on Exchange Settlement balances held by financial institutions at the Bank
  • a target of around 0.1 per cent for the yield on the 3-year Australian Government bond
  • the expanded Term Funding Facility to support credit to businesses, particularly small and medium-sized businesses, with an interest rate on new drawings of 0.1 per cent
  • the purchase of $100 billion of government bonds of maturities of around 5 to 10 years over the 6 months following the Board meeting on 3 November 2020.

Statement by Philip Lowe, Governor: Monetary Policy Decision

At its meeting today, RBA decided to maintain the current policy settings, including the targets of 10 basis points for the cash rate and the yield on 3-year Australian Government bonds, as well as the parameters of the Term Funding Facility and the government bond purchase program.

Globally, the news has been mixed recently. On the one hand, infection rates have risen sharply in Europe and the United States and the recoveries in these economies have lost momentum. On the other hand, there has been positive news on the vaccine front, which should support the recovery of the global economy. The recovery is also dependent on ongoing support from both fiscal and monetary policy. Hours worked in most countries remain noticeably below pre-pandemic levels and inflation is low and below central bank targets.

Financial conditions remain accommodative around the world, with bond yields near historically low levels. The positive news on vaccines has boosted equity markets, lowered risk premiums and supported further increases in some commodity prices. The improvement in risk sentiment has also been associated with a depreciation of the US dollar and an appreciation of the Australian dollar.

In Australia, the economic recovery is under way and recent data have generally been better than expected. This is good news, but the recovery is still expected to be uneven and drawn out and it remains dependent on significant policy support. In the RBA’s central scenario, it will not be until the end of 2021 that the level of GDP reaches the level attained at the end of 2019. In the central scenario, GDP is expected to grow by around 5 per cent next year and 4 per cent over 2022.

Employment growth was again strong in October, although the unemployment rate increased to 7 per cent as more people rejoined the workforce. A further rise in the unemployment rate is still expected, as businesses restructure in response to the pandemic and more people rejoin the workforce. The unemployment rate is forecast to decline next year, but only slowly and still to be around 6 per cent at the end of 2022.

The extended period of high unemployment and excess capacity is expected to result in subdued increases in wages and prices over coming years. In the September quarter, the Wage Price Index increased by just 0.1 per cent, to be 1.4 per cent higher over the year. In underlying terms, inflation is forecast to be 1 per cent in 2021 and 1½ per cent in 2022.

The RBA Board views addressing the high rate of unemployment as an important national priority. Its policy decisions over recent months will help here. These decisions are complementary to the significant steps taken by Australian governments to support jobs and economic growth.

The RBA policy response has lowered interest rates across the yield curve, which will assist the recovery by: lowering financing costs for borrowers; contributing to a lower exchange rate than otherwise; and supporting asset prices and balance sheets. The Term Funding Facility is also supporting the supply of credit to businesses. To date, authorised deposit-taking institutions have drawn down $84 billion under this facility and have access to a further $105 billion. Over the past month, the Bank has bought $19 billion of government bonds under the bond purchase program and a further $5 billion of Australian government securities in support of the 3-year yield target. Since the start of this year, the RBA’s balance sheet has increased by around $130 billion.

Given the outlook for both employment and inflation, monetary and fiscal support will be required for some time. For its part, the RBA Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market. Given the outlook, the Board is not expecting to increase the cash rate for at least 3 years. The Board will keep the size of the bond purchase program under review, particularly in light of the evolving outlook for jobs and inflation. The Board is prepared to do more if necessary.