Overview
2.1
When the Reserve Bank of Australia (RBA) appeared before the committee
in February 2009, international financial markets were stabilising after the
extreme turmoil of September 2008. However the effects of the events of
September 2008 for the world economy and the Australian economy were only just
beginning to become evident in the data.
2.2
It was clear that the contraction in economic activity in the December
quarter had been severe in many countries and that global growth had suffered.
Central banks eased monetary policy aggressively and Governments put fiscal
stimulus packages into place.
2.3
By May 2009 Australia was performing better than most economies and
signs of a turning point began to appear both domestically and internationally.
2.4
While GDP growth for most countries was still very weak, the rate of
contraction was abating. Industrial production and exports picked up in Asia and
the rate of growth in the Chinese economy increased. The RBA forecast a gradual
recovery for the Australian economy beginning at the end of 2009. Taking into
account the significant earlier easing of monetary policy and the considerable
fiscal stimulus measures, the RBA kept a fairly stable monetary policy setting
during this period.[1]
2.5
The International Monetary Fund
(IMF) forecast in July 2009 that global activity would contract by 1.4 per cent
in 2009 and expand by 2.5 per cent in 2010. This is 0.6 percentage points
higher than forecast in April 2009.
2.6
It is now clear that the Australian economy has remained resilient in
contrast with a very difficult international environment. During the hearing the
RBA noted that Australia had significant advantages going into the financial
crisis including, ‘a sound financial system, an absence of the worst of the
problems afflicting some other countries, exposure to an emerging China, and
scope to use macroeconomic policies to cushion the downturn.’[2]
2.7
These advantages have been helpful to Australia. Recent GDP data suggests
that output contracted only modestly around the turn of the year. Demand and
output have strengthened slightly, with household consumption continuing to
grow in the June quarter. The RBA is now forecasting modest growth of 0.5 per
cent over 2009, gradually firming through 2010. [3]
Forecasts for the Global Economy
2.8
The IMF reported in July 2009 that the world economy is stabilising, but
also noted that the global recession is not over:
The downward drag exerted by the
financial shock, the sharp fall of global trade, and the general increase in
uncertainty and collapse of confidence is gradually diminishing. However,
supportive forces are still weak. Many housing markets have yet to bottom out.
Importantly, financial markets remain impaired and bank balance sheets still
need to be cleaned and institutions restructured.[4]
2.9
Improvements are far from uniform across countries and economic activity
and credit growth are likely to remain subdued in many economies.
2.10
The IMF forecasts that GDP in advanced economies will decline by 3.8 per
cent in 2009 before growing by 0.6 per cent in 2010. In contrast, emerging
Asian economies (including China and India) are forecast to grow by 5.5 per
cent in 2009 and seven per cent in 2010. Growth projections for Latin America, Eastern
Europe, Africa and the Middle East have been revised downwards for 2009 but
have generally been revised upwards for 2010.[5]
2.11
Although expansionary macroeconomic policies are supporting global
activity temporarily, the IMF noted concern as to how private consumption will
hold up in the United States and other advanced economies once this stimulus is
removed.[6]
2.12
The RBA has noted that although the risk has decreased, the possibility
of another adverse shock to some part of the global financial system cannot be
ruled out.[7]
Forecasts for the Australian Economy
2.13
The RBA remains optimistic about Australia’s economic outlook. Its
central forecast is for the economy to grow by around 0.5 per cent over 2009,
compared with a forecast contraction of one per cent in May. This revision
reflects both a stronger than expected March quarter as well as more genuine
strength in the economy than had been expected in May.[8]
2.14
The economy is forecast to gradually strengthen through 2010 and 2011,
with growth expected to be around 3.75 per cent, or moderately above trend, by
the end of the period.[9]
Table 2.1 RBA Output and Inflation Forecasts (a)
|
|
Mar
2009 |
June
2009 |
Dec
2009 |
June
2010 |
Dec
2010 |
June
2011 |
Dec
2011 |
|
GDP |
0.4 |
¼ |
½ |
1 |
2¼ |
3¼ |
3¾ |
|
Non-farm GDP |
0 |
0 |
¾ |
¾ |
2¼ |
3¼ |
3¾ |
|
CPI |
2½ |
1½ |
2¼ |
2¾ |
2 |
2 |
2 |
|
Underlying inflation |
4 |
3¾ |
3¼ |
2½ |
2 |
2 |
2 |
(a)
Actual GDP data to March 2009 and
actual inflation data to June 2009. For the forecast period, technical
assumptions include A$ at US$0.84, TWI at 66, and WTI crude oil price at US$80
per barrel and Tapis crude oil price at US$83 per barrel. Sources: ABS;RBA
Source Reserve
Bank of Australia, Statement on Monetary Policy, 6 August 2009, p. 75.
2.15
Looking forward, consumption spending is likely to slow as the stimulus
from fiscal payments to households fades. While asset prices have recovered
from 2008, the decline in the net worth of household assets seen in 2008 is
likely to continue, contributing to higher rates of household saving.[10]
2.16
Home building is likely to pick up as a result of lower mortgage rates
and the temporary increase in the first-home buyers grant, although apartment
building may slow due to financing difficulties in that sector. Combined with
public sector infrastructure spending, this activity is expected to provide support
to demand.[11]
2.17
Inflation has started to fall and is expected to continue to moderate
due to easing capacity pressures and labour costs. The RBA’s central forecast
is for underlying inflation to decline, reaching a low of two per cent by the
end of 2010.[12]
2.18
On the other hand, the RBA has identified the risk that recent
improvement in indicators simply reflects changes in the timing of overall
spending, partly due to fiscal measures, and that over the second half of the
year private sector demand will weaken again.[13]
Inflation Targeting
2.19
During the hearing the committee asked where the main threats of higher inflation
are coming from within the economy. The Governor explained that people
understand goods and services inflation as demand versus supply but expectations
also play a part. The Governor commented that ‘if we all expect inflation to
continue, we behave accordingly and that helps it happen.’[14]
2.20
The Governor then explained that this tendency is problematic in a
booming economy. The Governor stated:
In that situation where the
economy is booming, inflation is high and inflation expectations are starting
to rise, that is obviously troubling and it is very important to keep those
expectations anchored at a low level, which is part of the reason for having an
inflation target, as we do.[15]
2.21
In relation to demand and supply, the Governor explained that he does
not think there is a problem regarding demand versus supply and that inflation
will continue to gradually subside. The Governor stated:
On the excess demand versus supply
side, clearly capacity usage has come down quite noticeably. It is not really
low at this point and it seems to be levelling out. But there is more spare
capacity in the economy now than there was and that is part of the story that
we are telling in our statement for why we think inflation will continue
gradually to subside for a little while yet.[16]
2.22
The committee raised the question as to whether the Governor has
any concerns regarding Australian Bureau of Statistics (ABS) methodology for
forecasting underlying inflation. The Governor responded that the measure of core inflation
that the Reserve Bank uses was created by the Reserve Bank and that he has no
particular criticisms of the measure. The Governor did say that there are, ‘one
or two things in the CPI that I think are methodologically difficult.’[17]
However he conceded that this would always be the case.[18]
Monetary Policy
2.23
The committee sought an update on the factors influencing monetary
policy settings. The Governor began by explaining the basis of the current
settings:
…what we have got in place at the
moment is an emergency setting. It is a setting of the cash rate that is the
lowest for 40 years put in place in anticipation that the economy would be
seriously weak... As the set of risks that you think you face start to shift,
at some point you are going to have to make a response to move away from the
emergency setting.[19]
2.24
The Governor then explained the importance of moving from the current emergency
setting to a more normal level as the economy recovers:
I think that there is ample
evidence elsewhere in the world of problems that you ultimately get if you keep
the emergency setting in place for too long… when the emergency has passed you
have got to then think about withdrawing the emergency measures over time.[20]
2.25
The committee asked what the Reserve Bank defined as a ‘normal level’
for the cash rate. While the Governor did not state a specific level he did
comment that, ‘it is probably noticeably higher than three’.[21]
2.26
Concerned about the possibility of interest rates rising, the committee
asked the Governor what advice he could give to people thinking about buying
their first home. The Governor noted that while he does not give advice to
homebuyers, ‘I think I would say to anybody who is contemplating taking on a
variable rate obligation that interest rates could always rise and you should
always allow some capacity to cope with that.’[22]
Fiscal Stimulus
2.27
The committee enquired what risk there is in over-stimulating the
economy if the delivery of certain parts of the Government stimulus program were
to be delayed. The Governor stated:
At the present time I do not think
we are in the position of feeling that we are going to get serious problems of
imbalances arising from those delays thus far. That could change if there were
to be much bigger delays, of course, but at this point the various stimulus
things that have been announced over the past year are built into the numbers
we put out.[23]
2.28
In a related question, the committee asked at what point the Government
should consider winding back some of the fiscal stimulus measures. The Governor
responded that the current projections include an automatic winding back of the
fiscal measures. In regards to whether some measures should be stopped before
they start, the Governor stated:
If we are doing better than the
forecast at some point, we will probably respond to that. Whether the
government is able to or chooses to respond with discretionary changes in the
already announced fiscal things is really up to them.[24]
2.29
The committee enquired whether there is a point at which increasing debt
to pay for stimulus measures becomes counterproductive. The Governor answered
that it depends how much debt there is and whether or not it is manageable
given reasonable trends. The Governor stated:
I think that the sort of federal
debt we are going to see, if the projections in the budget papers turn out to
be right, will be that net debt is going to go from about minus five per cent
of GDP and, according to the budget figures, peak at less than 15 per cent.
That is a significant change, but 15 per cent of GDP is a low number by
virtually any other standard. So I do not feel that that debt burden, if that
is what happens, is going to seriously impair the country’s economy.[25]
2.30
Similarly, the committee sought clarification of the claim that
the current stimulus measures will result in a large public debt for future
generations. The Governor noted that his generation inherited public debt from
his grandparent’s generation and that there is no rule in economic theory that
states that the optimal amount of debt is nothing. Instead, the Governor said
that, when considering the level of public debt it is important to ask the
question: ‘is it, around a stable trend, manageable?’[26]
The Governor went on to say that, considering the budget deficit is currently
slightly smaller and the rate of debt accumulation somewhat slower than
forecast in the budget, ‘I think that will prove to be manageable.’[27]
2.31
In the course of discussion on the level of public debt, the Governor
noted that the budget deficit in Australia was five per cent at the time of the
financial crisis; a comparatively low level by global and Australian standards.
The committee sought advice as to why the level of public debt was so low at
that time. The Governor credited a legacy of conservative fiscal management in
Australia compared to other countries over the past two decades. The Governor
stated:
I would say that is basically
pretty conservative fiscal policy for quite a long time. Also, privatisations
in the 1990s took out quite a bit of the debt that was in existence then. The
privatisation of Telstra reduced debt a lot but, by and large, for probably 20
years we have had, on the whole, pretty conservative fiscal policy in this
country by the standards of others. That is the legacy. It is that legacy that
has made the room for fiscal policy to do what it did in the downturn—that is,
move to expansion—just as prudent monetary policy for a long time meant that we
had scope to cut interest rates credibly and help the economy. You earn that
scope on both monetary and fiscal policy by many previous years of careful management.[28]
Bank Guarantee
2.32
The committee asked what preconditions are needed for the
withdrawal of the government guarantee for retail deposits and wholesale
funding, as well as a likely timeframe in which such preconditions may occur.
In relation to both retail and wholesale lending arrangements the Governor stated
that, ’I would say
that we are not far now from a world where we do not really need to have the
banks using those guarantees.’[29] In regards to the retail
guarantee the Governor stated:
I
do not think that the likely ending point for retail is that the financial
claims scheme… could be changed. The scheme is in legislation now, I think, so
that is going to be there. Most countries have some kind of deposit insurance,
so that it is likely to persist.[30]
2.33
Following this, the Governor noted that most countries have specified an
end date for the guarantee programs. The Governor stated:
Most countries actually put an end
date for when the guarantees would finish. A number of them have had to extend
it but for most of them it is the end of this year. Really, if all those
countries allow that to come to fruition and the guarantee is no longer
available, I cannot really see why we are going to need it much longer. [31]
2.34
The Governor further explained that the design of the guarantee on
wholesale funding is such that the banks will naturally cease participation in
the program once market conditions normalise. The Governor stated:
…when the pricing of the fee for
the guarantee was set it was set in a way that we hoped would be such that when
market conditions normalised it would be too expensive to issue with the
guarantee and would naturally therefore fall into disuse. We are probably not
that far actually from that stage. I think that it would be good for our
institutions to just start to issue in their own name anyway as much as they
can.[32]
Housing Supply
2.35
The committee made reference to a speech given by the Governor in which he
outlined a short term policy challenge of how to ensure that the current ready
availability and low cost of housing finance is translated into more dwellings,
not just higher prices. The committee questioned the Governor as to whether he
believes that
Australia is experiencing a housing bubble. The Governor stated that he never
used the word bubble and does not believe that Australia is currently
experiencing a housing bubble. The Governor clarified the comments made in the
earlier speech saying:
The point I was making in the talk
was that, at the moment, big-ticket construction is slowing down for various
reasons that we are all familiar with. A couple of years ago it was booming and
the housing part was being held back by high interest rates, among other
things, to make room. We do not need to do that now. This is the time when we
can build more houses, and the population dynamics are such that we should be
building more, I think. The physical resources are more available to do it now.
The financial resources are there for the end buyers at least— interest rates
are low, credit is available for home buyers. This ought to be a moment when we
can get some new stock built, hopefully without too much of a run-up in the
prices of existing homes. That is the point I was making. I think it would be
disappointing if we cannot manage that.[33]
2.36
The committee sought further clarification on whether the Governor felt
that there is a bottleneck in the supply of dwellings. The Governor responded:
I am not an expert in the fine
detail of zoning laws and those things, but I think it is demonstrably true
that, certainly in this city [Sydney], the price of a marginal block of land is
quite high… There are levies and so on which contribute to that. There may well
be good reason to have those various charges from a community point of view,
but I suppose what I am saying is that we ought to be prepared to examine the
question of whether we have managed to make the supply price of the marginal
dwelling higher than it really needs to be.[34]
2.37
The committee enquired more generally if central banks should
have a role in dealing with asset price bubbles. The Governor explained that
there is a considerable amount of debate both internationally and in Australia
as to whether central banks should act to control asset price inflation when
there is a harmful level of leverage attached.
He also noted that there is considerable debate over what tools to use
to control inflation once the decision to act has been made. The Governor
expressed the following view on the Reserve Bank’s role in such a situation:
I personally would not want to
commit to saying, ‘We’re definitely never going to pay attention to asset
prices and totally ignore them.’ That has been shown to be a mistake,
basically. But nor do I think it is our brief to aggressively chase down asset
things that pop up here and there that we might personally find hard to accept
or agree with, at the expense of other things that we have as our objectives.
So I think that, into the future, it is going to be a matter of judicious,
careful use of our instrument in trying to meet all these worthy goals.[35]
2.38
The Governor was then asked that if supply bottlenecks were mainly
responsible for causing housing asset price inflation, then should the policy
priority be to address those supply issues rather than put up interests rates
to control house prices. The Governor stated:
I would not be proposing a policy
of raising interest rates simply because house prices were rising. It is one of
the factors; it is one of the parts of the whole mosaic that is the economy to
which we try to calibrate our instrument. But is it worth re-examining all
these supply issues? I would say yes, without having any great expertise in
being able to tell you how exactly that might be done.[36]
Labour market
2.39
Conditions in the labour market softened in 2009, with unemployment
increasing and employment being broadly flat. In July the unemployment rate was
5.8 per cent, around 1.75 per cent higher than the lowest point in 2008 and 0.2
per cent below its peak.[37] This is a smaller rise
in unemployment than was forecast in February 2009.
2.40
The Governor noted that there has been a significant fall in the number
of hours worked and that this may be a more reliable gauge of the extent of
labour market weakening than unemployment figures. The Governor compared this
with earlier downturns stating that the reduction in hours has occurred across
more people, rather than being concentrated among a group of unemployed.
2.41
Describing the magnitude of the current downturn in terms of employment
conditions, the Governor stated, ‘at this point, the fall in hours worked looks
larger than what occurred in 2001, but not as large as in 1991.’[38]
2.42
The Governor expanded this observation to the broader economy saying:
In fact, I would say that is
probably at this point a reasonable characterisation of this downturn in
general. That is, on the basis of the information we have at the moment, this
may well turn out to be one of the shallower recessions Australia has
experienced.[39]
2.43
The committee asked how monetary policy as a tool can deal with sectoral
differences within the economy. The Governor replied that:
…we have got to make policy for
the aggregate, bearing in mind those sectoral differences and attuning to them
as best we can. But in the end it is the aggregate that we have to pay the
highest regard to.[40]
2.44
The Governor further explained that in the case of chronic youth
unemployment:
The best way to prevent that is
going to be a growing economy, a flexible set of labour arrangements and an
economy that is well in balance. Our job is to try to play our part in keeping
that balance, which, at the moment, of course, means interest rates are
unusually low. But if we keep them low too long then we will get imbalances
that will not help the chronic unemployment potential for those people. So the
best we are going to be able to do is a recovering economy on a balanced growth
path. That is what we are aiming to achieve.[41]
Exchange rates and external trade
2.45
The RBA stated in its August Statement on Monetary Policy that:
On a trade-weighted basis the
Australian dollar has appreciated by 22 per cent from a trough in early March 2009
and is now 12 per cent above its post-float average. The appreciation in the
currency continues to be underpinned by the pick-up in commodity prices and by
the general improvement in global investor sentiment.[42]
2.46
The Australian dollar traded at US$78.55 cents as at the hearing date.[43]
2.47
The weakness in the global economy over the past year has contributed to
a significant decline in commodity prices and Australia’s terms of trade,
although spot prices for coal and iron ore and for exchange-traded commodities
have generally strengthened over the past three months.[44]
2.48
Australia’s export performance has been surprisingly strong, underpinned
by a pick-up in Chinese demand for resources and a rise in farm output. Assistant
Governor, Dr Phillip Lowe explained:
…if you look at our last nine
months then our export volumes are probably up three or maybe four per cent. If
we look at every other country around the world, their export volumes have
fallen—in many cases by 10 per cent and in some cases by 20 or 30 per cent. So
Australia has been able to sell more goods to the world in a period in which
global trade has collapsed and industrial production has collapsed. There are a
number of reasons for that but the main one is, in fact, China. Of our total
exports 23 per cent went to China in the last quarter.[45]
2.49
Australian resource export volumes are estimated to have been
broadly flat over the three quarters to June, although values have declined by
nearly 30 per cent, with prices bearing the adjustment rather than volumes.[46]
China’s demand for resources has been an important part of the resilience of
Australian resource export volumes.
2.50
Also part of the story is a recovery in Australia’s rural exports. Volumes
have risen by nearly 20 per cent over the three quarters to June, reflecting
the recovery in production following a return to more normal seasonal
conditions in 2008.[47]
2.51
Service exports have also held up comparatively well and are estimated
to have risen by four per cent over the three quarters to the June quarter.
This has reflected continued solid growth in travel services, which includes
education services.[48]
2.52
In contrast, the volume of manufactured exports is estimated to have
declined by around 15 per cent over the three quarters to June, led by sharp
falls in transport equipment exports. This is broadly consistent with the
experience in other economies.[49]
2.53
The Governor stated that overall, ‘Australia’s terms of trade are likely
to be around 20 per cent lower this year than the peak last year, but they are
still about 45 per cent higher than the 20-year average up to the year 2000.’[50]
United States, China and the global economy
2.54
The outlook for the global economy is looking distinctly better than a
few months ago. The Governor noted that conditions in international markets
have continued to improve and while there are occasional reversals, each time
the recovery trend has continued.
2.55
In regards to the USA and Europe, the Governor observed that they only
now seem to be reaching a turning point towards recovery.[51]
2.56
United States GDP fell by a further 0.3 per cent in the June 2009
quarter, however this was a significantly smaller contraction than the 1½ per
cent contraction seen in both the December 2008 and March 2009 quarters.
Exports seem to have bottomed out and importantly the housing market is showing
signs of stabilisation.[52]
2.57
Significant factors weighing on the United States’ economy are weakness
in consumption as households seek to pay off debt and the significant rise in unemployment
in the first quarter of 2009 as a result of the large contraction in output in
the December quarter of 2008. Output in the USA fell once again in the June quarter
of 2009. [53]
As a counter to weak demand, fiscal stimulus measures, estimated to amount to
around four percentage points of annual GDP, have been put in place over the 18
months to September 2010.[54]
2.58
Economic activity in the UK is similarly weak with GDP falling in the
June quarter by 0.8 per cent, following a fall of 2½ per cent in the March
quarter. The unemployment rate has increased significantly, but there are signs
that house prices are stabilising. Likewise, economic activity in Europe looks
to still be contracting, although the pace of decline has slowed.[55]
2.59
In contrast to the USA, UK and Europe, emerging Asia, notably China and
India, has experienced a marked improvement in economic activity. The Governor
attributed this to a handful of factors, ‘the significant stimulus put in place
by governments in those countries, the dynamics of the inventory cycle, the
healthier state of financial systems in that part of the world and, in all
likelihood, just the inherently better secular growth prospects for those kinds
of countries.’[56]
2.60
Recovery has been most marked in China. Recent estimates suggest that
after quarterly growth slowed to around 0.5 per cent in the December quarter,
it picked up to around 1.5 per cent in the March quarter, and then accelerated
to over four per cent in the June quarter.[57] The IMF has
significantly upgraded its forecast GDP growth for China, bringing it to 7.5 per
cent in 2009 and 8.5 per cent in 2010.[58]
2.61
The committee asked how China’s strong recovery has impacted Australia.
Assistant Governor Lowe stated that Australian export volumes have increased by
roughly three or four per cent over the past nine months. He said that this is
remarkable because it is at a time in which every other country in the world has
seen a fall in their export volumes.
2.62
Assistant Governor Lowe said the main reason for this is, ‘very strong
demand for resources in China, largely because of the fiscal stimulus that is
going on there’.[59] On top of this,
Assistant Governor Lowe stated that there has been an increase in the
proportion of Australia’s exports going to China, ‘Of our total exports 23 per
cent went to China last quarter. If you look back 10 years, China was taking
four per cent of our exports.’ [60]
2.63
Growth prospects for India, Korea, Singapore and Japan are also
improving.[61] Largely reflecting
improvements in the situation of emerging Asian economies, the IMF raised its
year-average growth forecast for 2010 by 0.6 percentage points to 2.5 per cent.[62]
2.64
The Governor noted that although the IMF has raised its forecast for
global growth in 2010, the forecast for overall growth is still relatively
lacklustre.’[63]
2.65
The committee sought information on the risk of inflation in the global
economy stemming from high levels of debt to GDP and what implications this
would have for monetary policy here in Australia. The Governor outlined two
schools of present thinking concerning the global economy:
On the one hand some countries
have genuinely worried about deflation in the near term because of extremely
weak demand... On the other hand there are other people who worry… about the very
large budget deficits that some countries are running… we are talking about
countries like the US or the UK and some others that have 10 or 12 per cent of
GDP deficits and gross debt burdens going to 100 per cent and so on. So people
who look at the long run look at all that and think, ‘Isn’t there a risk that
somehow inflation will get going again? So you have got both these concerns:
possibility of short-term inflation being too low, but possibility of it being
too high in the medium term.[64]
2.66
In regards to how Australia should best deal with either situation the
Governor stated,
…our best bet is to have an
inflation target, a flexible exchange rate which lets us set our own monetary
policy without being mechanically helped up by someone else, an independent
central bank to pursue that target and broad political support for that
framework.[65]
Household debt
2.67
Indicators of Australian household activity have been comparatively
strong over the past year. Retail sales and the housing market have been
buoyant since late 2008 and there has been a significant rebound in consumer
sentiment in recent months.[66]
2.68
After falling by 10 per cent over 2008, household net worth has
increased in the first half of 2009, with both housing and equity prices
rising. In addition, household incomes have been boosted by budget measures, in
particular transfer payments amounting to around $20 billion (2.75 per cent of
annual household disposable income) to low and middle-income households between
December and May.[67]
2.69
The committee asked if the Governor saw consumer behaviour changing in
the recovery and whether households would go back to the high consumption levels
seen before September 2008. The Governor responded:
If you looked over a five-year
horizon, I would expect that it would be a little surprising if the process of
gearing up a low savings rate et cetera, which we saw for some years, were such
a prominent feature. [68]
2.70
The Governor suggested that the trend would be towards more savings and
that this trend may have already been developing. The Governor stated:
We are already in a period with an
adjustment towards less gearing up, a bit more saving, a little bit more
thrift. I suspect that was already coming. I would think that we might expect a
little bit more of that in the future. You cannot be sure, of course, but that
would be my guess.[69]
2.71
The committee raised the question of how the current situation of rising
unemployment coupled with reduced working hours will feature in the Bank’s
future decisions on monetary policy. The Governor noted in his opening
statement that following the 2008 financial crisis the RBA, ‘aggressively eased
monetary policy, delivering the largest reduction in debt servicing for
indebted households in modern times.’[70] The Governor further
referred to the August Statement on Monetary Policy and pointed out that the
debt servicing level for mortgages has fallen by four percentage points of
income since mid-2008. The Governor reminded the committee that the reduction
in working hours is factored into the calculation of the debt servicing level.[71]
2.72
The Governor said that the capacity of households to keep servicing debt
during the current employment climate remains good. The Governor stated:
I think we would have to say that
more people remain in jobs today than most of us thought would be the case six
months ago and they are paying lower interest rates. So, not surprisingly, the
capacity to keep servicing those loans has actually remained quite good.[72]
2.73
The Governor further explained that the current situation of reduced
working hours is preferable to a situation in which businesses shed jobs
because households are better able to service debt than if those people had
lost their jobs altogether. The Governor stated that:
The decline in hours versus
unemployment actually helps this, I think, because I do not think there is much
doubt that the single biggest problem that people would have in servicing a
loan obligation of any kind is going to be if they lose their job. If their
hours are reduced and the income is reduced but there is still an income
coming, that is a much better situation than the loss of the income.[73]
2.74
Looking forward, the Governor predicted that some of the strength in
household spending may lesson as the temporary effects of the fiscal stimulus
package decrease.[74] Overall however the
Governor forecast that household wealth and the impact of low interest rates
are likely to be supportive of demand in the period ahead.[75]
The Payments System Board
2.75
The Payments System Board has
responsibility for determining the Reserve Bank's payments system policy. The Reserve Bank Act 1959 states that the Board must exercise this
responsibility in a way that will best contribute to:
n controlling
risk in the financial system;
n promoting
the efficiency of the payments system; and
n promoting
competition in the market for payment services, consistent with the overall
stability of the financial system.
2.76
The Payments System Board has presided over a significant reform agenda.
The committee requested that the Governor outline the key reforms to date and
key decisions that are outstanding that remain to be made. The Governor began
by explaining the Board’s work on card system interchange fees.
There is a long amount of work
done on card system interchange fees—a very bitter battle fought—and the result
of all that was that we brought interchange fees down to 50 basis points. We
did a number of other things which basically enabled more merchant choice in
what merchants accept and which caused the consumers to face the price of the
benefits they are getting in terms of points and so on.[76]
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Following the Board’s work on card system interchange fees, the Governor
then outlined the Board’s work on ATM interchange fees:
There has been another set of
changes, which were just coming in last time we met, on ATMs. The result of
that has been that, at most institutions, foreign fees have disappeared. The
owner of the ATM charges you, if they wish to, to use the machine. As far as I
can see, that reform has worked quite well. Many people can actually get a
cheaper transaction now.[77]
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The Governor further explained the Board’s work on EFTPOS arrangements:
We have been trying to press the
institutions which have stakes in the EFTPOS arrangements to update both the
technical architecture of that system and its governance arrangements, and
there is some progress being made there; it is not quite as quick as I had
hoped but nonetheless progress is being made.[78]
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Finally, Assistant Governor Lowe further explained the Board’s role in
the international payments system:
In the wholesale part, a very big
issue globally is the use of central counterparties and central settlement
facilities to try to reduce systemic risk. The US Federal Reserve just last
week put out a number of proposals in that area. That is another general area
of the Payments System Board’s responsibility and I think it is going to be a
focus over the next year or so as people look at how the international
financial architecture can be reformed to give greater stability when
institutions get into trouble, and the use of central counterparties is clearly
going to play a role there.[79]
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The Payment System Board had indicated in
September 2008 that it would be prepared to step back from interchange
regulation if industry participants took sufficient steps to reduce the risk
that interchange fees would rise in the absence of regulation.[80]
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On 26 August 2009 the Payments
System Board announced that the conditions for the removal of interchange
regulation had not been met. The Board stated that, ‘although progress has been made… it is not yet
sufficient to warrant a decision to step back from interchange regulation.’[81] As such the Board concluded that it was not in the
public interest to remove interchange regulation at this time but stated,
‘These matters will remain under review, and the Board is prepared to re-open
consideration of the regulations in light of industry developments.’[82]
Conclusions
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The global and Australian economies are showing signs of having reached
a turning point towards recovery.
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The pace of global economic recovery over the next few years is expected
to be relatively subdued, especially in larger advanced economies. The
Australian economy has performed better than forecast at the beginning of the
year and is projected to gradually strengthen through 2010 and 2011, showing
better growth outcomes than other advanced countries.
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Several factors have contributed to a return to growth in the Australian
economy, namely: exposure to strong demand from China and India for Australian
resource exports; resilient consumer, business and public demand resulting from
Government stimulus measures; and a partial recovery from drought conditions in
the agricultural sector.
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Despite the move towards recovery, problems in certain sectors of the
economy remain. Specific challenges include, but are not limited to, the
undersupply of affordable dwellings nationally and chronic youth unemployment
in particular regions.
Craig
Thomson MP
Chair
22
October 2009