Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
Standing Committee on Economics
06/08/2021
Reserve Bank of Australia annual report 2020

BULLOCK, Ms Michele, Assistant Governor (Financial System), Reserve Bank of Australia [by video link]

DEBELLE, Dr Guy, Deputy Governor, Reserve Bank of Australia [by video link]

ELLIS, Dr Luci, Assistant Governor (Economic), Reserve Bank of Australia [by video link]

LOWE, Mr Philip, Governor, Reserve Bank of Australia [by video link]

Committee met at 09:30

CHAIR ( Mr Tim Wilson ): I declare open this hearing of the House of Representatives Standing Committee on Economics for the review of the Reserve Bank of Australia annual report 2020 . I welcome representatives of the Reserve Bank as well as members of the public and media watching the webcast. The RBA last appeared before the committee publicly in February. I could give a long statement about various things to do with monetary policy and RBA decisions, but, frankly, if you read the newspapers or credible media you'll know what's happening already. The reality is we are in a very difficult time, with three states again in lockdown and monetary policy playing a role in supporting the economy, but many small and medium businesses being hollowed out as a consequence of COVID-19 policy responses. The questions before the RBA, then, are what it does in terms of its decisions to support the economy from a monetary side at this critical time and its outlook into the future.

This hearing is being webcast. It can be viewed by members of the public via the parliament's website. We have representatives from the RBA appearing for today's hearing. I remind you that, although the committee does not require you to give evidence under oath, the hearings are legal proceedings of the parliament and warrant the same respect as proceedings of the House. The giving of false or misleading evidence is a serious matter and may be regarded as a contempt of parliament. Governor, I now invite you to make an opening statement.

Mr Lowe : Thank you and good morning. Thank you, Chair, for arranging this hearing via videoconference. This hearing is an important part of the accountability process for the RBA, and my colleagues and I welcome the opportunity to explain our thinking and to answer your questions. We really look forward to the day when we can all meet together again in Canberra.

Later this morning, the Reserve Bank will be releasing our quarterly statement on monetary policy. I would like to take this opportunity this morning to highlight five key things from this report. The first is that the Australian economy has bounced back quicker and stronger than was earlier expected. Prepandemic level of GDP was regained in the March quarter, and that's more than a year earlier than we had expected in August last year. But it's in the labour market where the recovery has been most remarkable. In June, the unemployment rate fell to 4.9 per cent, which is lower than it was before the pandemic. There has been strong growth in jobs across most parts of the country, and job vacancies have been at record highs. And, in stark contrast to the experience of most other advanced economies, labour force participation and the number of hours worked have both recovered to above prepandemic levels. These outcomes are testament to the effectiveness of the public policy response, including the early success on the health front, and the ability of Australians to adapt to their changed circumstances. The economic policy response involved the public sector using its balance sheet to support the economy and to keep people in jobs. Fiscal and monetary policy worked together well, and the response of Australia's financial institutions also helped. Households and businesses also showed remarkable resilience and an ability to change how they do things. So there's a positive story of resilience here.

Now to the second theme, which is that the recovery has now been interrupted by the outbreaks of the highly infectious delta strain, especially in NSW but also in a number of other states. The outbreaks mean that GDP is likely to decline in the September quarter. How large the decline will be depends upon the duration of the lockdowns and whether there are further material outbreaks elsewhere in Australia in the weeks ahead. As a rough rule of thumb, household consumption in areas that are locked down is typically around 15 per cent lower than it otherwise would be. In addition, the lockdowns have directly affected construction activity in NSW and delayed some investment plans.

Some increase in the unemployment rate is also expected over the months ahead, although most of the adjustment in the labour market is likely to be through a decline in hours worked and participation rather than in job losses. As we assess the impact of the lockdowns on the economy, it's important not to lose sight of the fact that not all of Australia is affected. Significant parts of the Australian economy are still on the positive trajectory that was in place before the outbreaks. This is quite a different picture from the situation we were in in the first half of last year when the whole of Australia was in lockdown. So at least at the moment it's still a mixed picture.

The third theme from the statement on monetary policy is that the recovery is expected to bounce back quickly once the restrictions ease. The experience both in Australia and elsewhere is that once restrictions are lifted spending recovers strongly, especially if people have confidence about the future. While the exact timing of the bounce back is difficult to predict, it's likely to start well before the end of the year. The vaccination program is ramping up and governments are providing significant targeted income support to help businesses and households get through this difficult period. This means that there is a pathway out of the current difficulties this year. Earlier in the week the Reserve Bank Board considered a range of possible scenarios for the Australian economy over the next couple of years. Our central scenario is that the economy will return to strong growth in 2022, with GDP increasing by a little over four per cent, to be followed by growth of around 2½ per cent in 2023. In this scenario, the unemployment rate resumes its downward path, to reach around 4¼ per cent by the end of next year and four per cent in the following year. The board also considered upside and downside scenarios, the details of which we'll publish later today, with much depending upon the health outcomes.

One source of uncertainty is the possibility of vaccine resistant virus strains emerging over time; another is that it's still unclear what type of adjustments our society will have to make to live with COVID on an ongoing basis. Once vaccination rates are high enough, we will be living with a virus that's endemic, rather than living through a pandemic. What this endemic phase looks like is still to be determined. On the upside, it is possible that the Australian economy will again experience the run of positive surprises that it did earlier in the year. If we are successful in containing the virus over the months ahead it is possible that there will be stronger upswings in both investment and consumption than envisaged in our central scenario.

The fourth theme in today's statement on monetary policy is that we have not yet had the same upside surprises in wages and prices that we've experienced in jobs and output, and that it will take some time for inflation to be sustainably in the two to three per cent target range. Both wages growth and underlying inflation are subdued, and we expect this to remain the case for some time yet. While there have been reports of labour shortages in parts of the country, and a step up in wages for some occupations, wage increases for most Australians are still modest. Underlying inflation also remains low, at around one and three-quarter per cent over the year to the June quarter. In contrast, though, headline inflation spiked at 3.8 per cent in the June quarter, but this largely reflected the unwinding of some earlier COVID related price declines.

In our central scenario, both wages growth and underlying inflation pick up, but they do so only gradually. The central forecast is for underlying inflation to be one and three-quarter per cent over 2022 and 2¼ per cent over 2023. We're hoping the wage price index is expected to pick up gradually to two and three-quarter per cent over 2023, with growth in other measures of labour costs slightly higher than this. One source of forecast uncertainty here is that Australia has had little recent experience with the low unemployment rates that are being forecast now. At the peak of the resources boom in 2008, the unemployment rate briefly got as low as four per cent, but before that the last time the unemployment rate was at four per cent was in 1970s. Our economy and our institutions were very different then than they are today, making it very hard to draw any lessons from this earlier experience.

Notwithstanding the uncertainties here, there are a number of factors that make it likely that the pick-up in wages and inflation will be gradual. These include enterprise agreements that run for a number of years; a business mindset that is very focused on cost control, inflation expectations that remain low; a relatively high ongoing rate of underemployment; and the fact that it will take some time yet before the spare capacity in the economy is fully absorbed. Together, these factors help provide a reasonable basis for expecting that Australia can sustain an unemployment rate in the low fours, but only time will tell.

That brings me to the final theme of today's statement on monetary policy, and that is that the RBA's package of monetary policy measures is providing substantial support to the Australian economy in the face of the lockdowns and the expected resumption of the economic expansion later this year. These monetary policy measures include the term funding facility; a yield target for the April 2024 Australian government bond of 10 basis points; the bond purchase program under which the RBA is purchasing bonds issued by the Australian government and by the states and territories; and a cash rate target of 10 basis points.

I would like to provide the committee with an update on each of these elements of our package—first, the term funding facility. A total of $188 billion was drawn down by financial institutions under this facility before the deadline for final drawings on 30 June. The interest rate on most of these funds is just 10 basis points, and the funding does not have to be repaid for three years. This means that, even though the facility is now closed to new drawings, it will continue to provide support and will continue to support lower funding costs in Australia out to the middle of 2024.

At its July meeting, the board also considered the yield target and decided to retain the April 2024 Australian government bond as the target bond rather than extend it to the November 2024 bond. The target remains at 10 basis points, the same as the target for the cash rate. The yield target is playing an important role in keeping funding costs low and reinforcing our forward guidance regarding the cash rate and will continue to play this role over the next few years. The decision not to extend the target to the next maturity reflects a shift in the probabilities regarding future movements in the cash rate. When a three-year yield target rate was introduced last year, it was difficult to conceive of scenarios in which the cash rate would be increased over the subsequent three years, which at the time ran to early 2023. Eighteen months on, with the improvement in the economy, there are now plausible scenarios in which the cash rate is increased over a three-year horizon which now runs until late20'24. Given this shift in probabilities, the board decided that it was not appropriate to extend the yield target to the end of 2024.

At our July meeting, we also decided that we would continue purchasing government bonds following the completion of the second $100 billion dollar program in early September. In addition, we decided that the purchases would be at the rate of $4 billion a week until at least November, rather than the current $5 billion a week. We also indicated we had a flexible approach and we could adjust the rate of purchases in either direction in response to economic news and changes in the outlook. At the board meeting earlier this week, we considered the case for delaying this tapering to $4 billion a week. The critical issue here is the outlook for the economy. As I discussed earlier, we are expecting a return to strong growth next year. Any additional bond purchases would have their maximum effect at that time and only a very small effect right now, when the extra support is needed most. The board also recognised that fiscal policy is the more appropriate instrument for providing support in response to a temporary and localised hit to income, and the board welcomes the substantial fiscal response by governments in Australia. We will, however, keep the situation under review, and we are prepared to act in response to further bad news on the health front that affects the outlook for the economy over the year ahead.

The final element of our monetary policy package is the cash rate. As I have said previously, the board will not be increasing the cash rate until inflation is sustainably in the two to three per cent target range. We want to see results on inflation before we move, not a forecast of inflation in the target range. It will not be enough for inflation to just sneak across the two per cent line for a quarter or two; we want to see inflation well within the target band and be confident that it will stay there. In making our assessments here we are paying close attention to growth in wages and broader labour costs. Under our central scenario, the condition we have set for an increase in the cash rate is not expected to be met in 2022.

Finally, I would like to mention one other important aspect of the RBA's operations—that is, our role as banker to the Australian government. Over recent weeks we worked very closely with Services Australia to make sure that the COVID disaster payments are made quickly. Once an application is made to Services Australia for assistance, the money can be in the person's bank account in less than one hour. On a recent Sunday, Services Australia, with the assistance of the RBA, processed over 300,000 individual payments through Australia's fast-payment system, with the money available to people immediately on the weekend. These fast payments are possible because of both the RBA's significant investment in our banking and payments infrastructure and our policy efforts over many years to encourage the banking system to develop a fast-payment system. The RBA also operates the settlement system that transfers money between banks' accounts in real time, 24 hours a day, seven days a week. It's really pleasing to see how these systems can be used to directly and quickly help people who are in need. Thank you very much. My colleagues and I are here to answer your questions.

CHAIR: Thank you, Governor. You have a mug on your desk that says 'half full'. Are you a half-full optimist about the state of the Australian economy?

Mr Lowe : I'm optimistic about next year. We have to traverse a difficult few months. There is a great deal of uncertainty about how the economy is going to travel over the next few months and much depends upon the health situation, but the experience here and elsewhere is that, once the health situation is brought under control, the economy bounces back quickly. There has been remarkable resilience by Australian households and businesses, and I think we can look forward, as long as the health situation is under control, to once again strong growth next year.

CHAIR: We now have Victoria, Queensland, New South Wales, in lockdown again. We've seen data that suggests that at least some households are adapting and some small businesses have also adapted to changing circumstances. Meanwhile, there are economists out there flagging the potential of another recession or a double-dip recession. What's your assessment?

Mr Lowe : As you say, there are many small businesses that are finding current conditions very, very difficult and that's likely to remain the case for some weeks to come. While the economy is locked down, much economic activity just can't take place and the businesses out there affected are finding it very difficult. I think it's quite unlikely that we will have two quarters with negative GDP. The September quarter will surely be negative, at least one per cent and possibly a bigger decline than that, depending upon whether there are further lockdowns and how long the existing ones last. But by the end of the year, many of us will be vaccinated, one hopes the restrictions will be eased from late in this quarter and then into next quarter and, as the restrictions are eased, the economy should start its recovery. So we can't rule out two quarters of negative GDP if the health situation deteriorates, but I think it is quite unlikely at this stage.

CHAIR: Does that mean the RBA's modelling is based on the Delta variant being obviously quite an impactful variant but it not being followed up with further variants that could cause similar episodes?

Mr Lowe : The central scenario involves some limited lockdowns next quarter and perhaps in the December quarter and then some limited lockdowns next year as well, but only limited. If we were to see a new strain of the virus, particularly if it was vaccine-resistant, then we would be in a whole different world but certainly that's not our central scenario.

CHAIR: Okay. But, resulting from lockdowns, we've seen consumers being shepherded into big corporate businesses, supermarkets and the like, largely at the expense of other businesses. Is the RBA worried about what seems to be a hollowing out of small businesses that are experiencing constant cycles resulting from lockdowns?

Mr Lowe : Well, we're certainly worried about the lockdowns and the restrictions affecting small business. As I said before, many businesses are finding things very difficult. The government support payments are helping. Last year those payments were very significant. In New South Wales, supported by the Federal government, there has also been support to businesses just recently. It's undeniable that things are very difficult for many small businesses. I think the money that was given to small businesses by the government last year and the current payments should help many of those businesses to get through. When you can't open your business and you have ongoing costs, you have financial strain. That's inescapable.

CHAIR: Isn't this one of the challenges, then: we're having consumers being sent into large companies to continue to support them, and there's justification—they can do this on the basis of scale, logistics, need et cetera—but there is actually a hollowing out of the economic middle, particularly those small businesses that compete and are either forced to shut or to significantly adapt to find an environment where they can compete and continue to attract consumers while they still have ongoing costs? We know from bank data that there have been applications from more and more people to defer loans and to look at options as well.

Mr Lowe : Yes. And of course it depends on how long this goes on for, doesn't it? There is a great degree of resilience in the small business community. Many businesses have a lot of margins of adjustment, and they're pulling on all those margins at the moment. The longer this goes on, though, the more difficult it will be, and you will start to run down your buffers. There's only so much flexibility that you're going to have. It all points to the importance of us all getting vaccinated as quickly as we can so that the restrictions can be lifted and small businesses can once again flourish. If you can't open up, then it's going to be difficult; you can't escape that.

CHAIR: There's no doubt about that. In terms of the employment scenario, you said in your opening statement that you expect that there won't be significant wage growth for some time as a result of a number of factors, including businesses being focused on controlling costs, the rollover of awards and the like, and time frames around that. What time frame is the RBA projecting in which to see some sort of wage growth?

Mr Lowe : Well, we're seeing wage growth now, aren'' we, at 1¾ per cent. But the pick-up is gradual, and, as I said, over the next couple of years we're expecting slightly stronger wage growth. But we still think that even in two years time aggregate wage growth will be perhaps a little below three per cent. So, it's a long, slow process. Our strategy is, once we get through the current health related difficulties, to keep monetary policy stimulatory, to get the unemployment rate down, so that firms have to compete more aggressively for workers, and part of that competition involves paying higher wages. That's our strategy, but it's going to take time. There are a lot of factors, and I went through some of them in my introductory remarks, that are leading to a lot of inertia in the wage-setting process. But I'm confident that if we can get the unemployment rate to four per cent then firms will have to compete more for workers, and that will involve higher wage rises.

CHAIR: Where does migration factor into your employment scenario?

Mr Lowe : The fact that we're not having the migration that we used to have is having a very significant effect on population growth. Population growth has gone from roughly 1½ per cent down to one per cent a year. So, the labour force is growing much more slowly than it used to, and that's affecting economic growth and employment and obviously employment growth. But the slowdown, or cessation, of immigration at the moment is having a severe effect on growth in the economy and therefore employment.

CHAIR: So would you like to see return to migration as business as usual once we get past this period in comparison to the highly suppressed migration levels we have at the moment as a result of our border restrictions?

Mr Lowe : It's not for me to offer opinions on the appropriate level of immigration. As I've said in previous hearings, the fact that Australia has been able to draw people from right around the world is one of Australia's great advantages. We are the great immigrant country of the post-World-War-II period. The fact that people have come here and wanted to improve their lives has brought a dynamism to our economy that we otherwise wouldn't have. It's boosted our connections with the rest of the world because we have people here who come from elsewhere. Their business and personal connections elsewhere are to our advantage. It's helped improve the nation's human capital. It's also delayed the ageing of the population. So there are a lot of very strong positives from immigration. I think the Australian nation should be very proud of what we have achieved here. We are a great immigrant country of the post-World-War-II period.

As we have talked about at previous hearings, the fast population growth did put pressure on our infrastructure and it did put pressure on our housing market. The population growth picked up and the rate of housing construction took the better part of a decade to respond to that. So there are a multitude of effects. I think it did affect parts of the labour market as well, and we could talk about that if you wanted to. So, in making an assessment of the merits of a return to past immigration, we have to take all those things into account. It's up to the parliament to balance all those considerations.

CHAIR: It is, but in the end there are still challenges. You speak to just about any business across the country and they will talk about the challenges they face around getting workers. There are obviously issues specifically in the context of skills. That can have a constraint on growth of the economy as well. So it's up to us to decide that, but as somebody who is interested in the overall welfare of the economy would you suggest that returning to or allowing for migration levels at the pre-existing levels would help to boost the economy? You just made a number of comments seeming to make the case that perhaps the slowing might have had its own, shall we say, benefits.

Mr Lowe : There are pluses and minuses to most things in life, and this is one of them. It's hugely advantageous for the country to be able to attract people who have skills that are in short supply. If we hadn't been able to draw on the global labour market we wouldn't have been able to have all that investment during the resources boom, and the country would be poorer as a result of that. There are many occupations where there is a shortage of people in Australia with the relevant skills, and the fact that we can draw on the global labour market to tap those skills is very advantageous to the country. So I think it is highly desirable to get back to a position where businesses can get people with the skills they need. Whether that means we need the same total number of people coming into the country as before is a question open to debate. But I hear a lot of stories, as do you, that businesses can't get the skilled workers they need. In the past they used to get those workers from overseas and that helped us.

CHAIR: That sounds to me like you are hedging.

Mr Lowe : I'm not. I'm just saying there are pluses and minuses. For me, the big-picture point here is that Australia has benefited tremendously from immigration. We are a better, richer, bigger country as a result of having people come to our shores and want to improve their lives. Having said that, though, there are adjustments needed. When population growth is quicker we have to change things. It's up to the parliament and society to balance all those things.

CHAIR: If you speak to just about anybody in international investment markets, including those who operate domestically, the big question mark sits around inflation and where people see inflation to be, particularly off the back of various forms of quantitative easing not just here but also of course in the United States and Europe. Where do you project inflation in light of the fact that there are decisions being made around the world which you don't control but which can obviously have a very direct impact?

Mr Lowe : I talked about our inflation outlook in my introductory remarks. We're expecting it to get back to just above two per cent in 2023. I think much of this discussion on inflation has come out of the United States, where earlier in the year there was an inflation concern. That concern was the result of both continuing stimulus by the Federal Reserve and a very large physical stimulus on top of an already very large fiscal stimulus. You had fiscal stimulus at a very high level. The Biden administration says their strategy was to go big, and the Federal Reserve was keeping monetary policy very stimulatory. Given that background, there were some investors who were worried that we would return to high rates of inflation, especially when you couple the stimulatory policy settings with the supply interruptions that we've seen, particularly in the global electronics market, which has affected the United States, and the car market as well. The US was in a substantially different position to the one we're in.

CHAIR: But it sounds to me like you're not particularly concerned about inflation.

Mr Lowe : Not in Australia. I think in the US you could debate it either way, but I would observe that in the past month inflation concerns in the US have started to recede a bit. The Federal Reserve has signalled that it may raise rates earlier than it was previously signalling, and the delta strain has thrown a question mark over the strength of the US recovery. Both of those things have seen inflation concerns recede.

Going back to Australia, which is really our area of responsibility, the fact that wages growth is likely to remain below three per cent for the next couple of years means it is very, very difficult for me to see us having an inflation problem. Sure, there will be particular commodities where prices go up because there's some shortage or disruption in the global supply chain, but eventually—and we're talking a matter of months or quarters, not years—those supply disruptions will get resolved and those price pressures will go away. Ultimately, here in Australia, it comes down to what's happening in the labour market. With wage growth of two-point-something, we're not going to have an inflation problem.

CHAIR: You're responsible for payment systems. The CEO of the Commonwealth Bank, Matt Comyn, recently made remarks about it in the context of things like the Apple wallet and whether that's being properly regulated. The acquisition this week of Afterpay by Square has brought this even more squarely—pardon the pun—into focus. Are you worried about the role of big tech, particularly fintech products like Apple wallet, and what it means for concentration in terms of payments, competition and of course also consumer data?

Mr Lowe : Am I worried about it? I would put it slightly—

CHAIR: More to the point, what are you doing in response to it?

Mr Lowe : There are a lot of complicated issues here. The payments landscape is changing very rapidly, and Apple regulatory arrangements need to keep pace with that.

CHAIR: Are they?

Mr Lowe : They need updating in a couple of areas.

CHAIR: So that's a no?

Mr Lowe : Well, there's a process, and I think the government rightly recognises this. It commissioned the review by Scott Farrell, through the Treasury, and we look forward to seeing the results of that review. I think the government has also committed to reviewing the regulatory arrangements that apply to stored value instruments, which are part of the new payments landscape, as well. We have further work to do here. Our regulatory arrangements need to keep pace with the fast-moving landscape, and I would encourage the parliament to, over time, adjust the regulatory arrangements here.

CHAIR: This is a critical issue, because you've got the issue around concentration and payment systems, including the shift towards products like Apple Pay—which I use myself, as do others—and the increasing shift towards fintech. In addition to that, there are already concerns that I have raised with you in previous hearings that if the RBA can't keep up with consumer behaviour, then behind that are some broader questions around the rise of central bank digital currencies and whether they could shift from the wholesale to the retail space, and whether that is ably equipped and has the capacity to address the change in technology. Do you feel you have the capacity to do that?

Mr Lowe : There are a number of elements here. On the central bank digital currencies, we have the resources to study and to undertake proof-of-concept experiments with a number of other central banks, which we are currently doing. We are devoting significant resources to understanding how new forms of digital money can be used in the economy to make it easier for businesses and households. So I don't have any particular concerns there.

On the regulatory front, under the relevant legislation the Reserve Bank has the power to designate and then regulate a payment system. The definition of what is a payment system is quite narrow. It has been narrowed by the courts from what was originally intended by the parliament. We have encouraged Scott Farrell, in his review, to think about a regime where we have power to regulate payment services as opposed to a payment system. I'm not sure where Scott has come out on that, but that would give us more flexibility.

CHAIR: But what I'm hearing from you is that the RBA doesn't have the powers it needs to address the challenges of changes in the payments platforms available to it and to fulfil its function. The model of using cash, which is what the system is broadly designed around, is becoming increasingly passe. Technology is transcending the RBA's capacity to fulfil its function.

Mr Lowe : On central bank digital currency, there is nothing in the regulatory framework that stops us doing that. I think the Payment Systems (Regulation) Act needs review. We need better arrangements for regulating stored value, and there are a number of other more detailed things we could talk about as well, if you wanted to. There is a need to update the legislation, including perhaps—and I think we've talked about the Farrell review—a special licensing regime for payments providers.

CHAIR: But are you concerned about the concentration of the number of payments that are increasingly going through a small number of channels, and do you think that that ultimately poses a threat, as some people have written, to our banks?

Mr Lowe : There are a couple of issues here. Apple Pay is clearly one that a number of countries are focused on—the fact that at least with the iPhone you have to use the Apple Pay wallet, and you can't provision another wallet on the phone. Some countries are requiring Apple to adjust its design to allow multiple wallets to be put on the phone. That's something the Reserve Bank can't do. The parliament could set up a process to do that, if it so chose. We are going to have a more competitive system if there can be competition amongst the providers of digital wallets. Ultimately, there will be lower fees and better services if we have competition and open access. So that is an issue. It's not something the Reserve Bank can do anything about. We do not have the power to do it.

CHAIR: Thank you.

Dr LEIGH: Governor, since we last met, we've had two more quarters of inflation data, two more quarters where you've undershot your inflation target, and your forecasts have you undershooting until at least the end of 2022. There is a risk that the economy will fall into recession later this year. In that environment, the markets were surprised when you didn't reverse the QE taper on Tuesday. You could see that from the rally of the Australian dollar and the 10-year bond rising four basis points. Effectively, you tightened monetary policy on Tuesday. Why don't you set monetary policy so that inflation is forecast to be at the midpoint of the target band over the medium-term horizon?

Mr Lowe : I take exception to a couple of things you've said there, including that we tightened monetary policy earlier this week—I can't agree with that. The effect of our bond purchases on the bond yield curve comes from the expected stock of bond purchases that we're likely to do over the entire program, and I don't think that changed at all as a result of our decision earlier this week. Our interest rates in Australia—the 10-year yield is now at just over 1.1 per cent; it has come down quite a lot recently. Our 10-year yields are below those in the United States and other comparable countries. So I can't agree that we tightened monetary policy earlier this week.

You've also got to remember the accumulated effect of what we've done. We've got the cash rate effectively at zero, the lowest ever, and we're committed to keeping that there as long as it is needed to get inflation back to two per cent. We've lent the banks nearly $200 billion at 10 basis points so they can provide low-cost funding to their customers. We've purchased more than $200 billion worth of government bonds so far and we're going to buy more, keeping yields down and keeping the exchange rates down.

The accumulated effect of all those measures is very substantial. It has us on a path—at least we expect—to get inflation back to two per cent. Buying $1 billion of extra bonds for a couple of months isn't really going to fundamentally shift that path.

Dr Debelle : Deputy Chair, you might acknowledge that we've actually overshot our inflation target. Our inflation target is defined in terms of the CPI so at least in the current quarter we are actually sitting above it materially. That is a rise in the cost of living for households, but we take account of that. I take your point, though, that over the medium term we are only gradually getting back above two per cent by the end of 2023.

Dr LEIGH: I would have thought it was fairly clear that the RBA was consistently undershooting the target band. One of the other issues we have discussed in previous hearings was negative rates; in 2019 you described them as extraordinarily unlikely. The ECB has had a policy interest rate that has been negative for seven years. German bond yields are negative out to a term of 25 years. We've had surveys of research on negative rates published by the IMF, the Bank of England, the ECB and the Federal Reserve all saying negative rates can help. Does the Reserve Bank update its position on questions like negative rates as new research comes out?

Mr Lowe : We certainly look at all that research, and I read it all with great interest. I would observe that during the last year and a half, during the pandemic, not one central bank that was in positive territory went into negative territory and not one central bank that was in negative territory went further into negative territory. I think that tells you something. The assessment of the central banks at the moment is that the incremental returns, to the extent that there are returns from negative rates, are not large. In fact, there are risks. People are rightly concerned about the implications for the health of the bank system and its ability to provide credit to the real economy and the response of the private sector to negative interest rates.

Dr LEIGH: There's been a recent series that the journalist Shane Wright has done on the Reserve Bank, with many calling for a fundamental review of monetary policy. We've seen reviews of that kind by the Fed, the ECB, the Bank of England, the Bank of Canada, the Bank of Japan, the Reserve Bank of New Zealand and the Reichsbank. Would you support a review of monetary policy, a review into the RBA?

Mr Lowe : I've read those articles with a lot of interest, as you can imagine. There are people who call for reviews. They just kind of say, 'There should be a review of the RBA.' But let's think about what that means, because there are three elements of the monetary policy framework. There's the element that's controlled by the parliament, there's one controlled by the government and there's one controlled by the board. The parliament sets our legislation. It wrote that legislation in 1959, and I think it's very sound. Your committee plays a role here in keeping the bank accountable, and this process we're going through is part of that.

So, the parliament has a role in setting the legislation and keeping us accountable. The government makes appointments to the Reserve Bank Board. So, they're responsible for the people who go on the board. The government and I as the governor sign a letter setting out our common understanding of how monetary policy works, and ultimately the government, under a provision of the Reserve Bank Act, can determine to override the decisions of the board with appropriate oversight from the parliament. So, the government has a role there. And the third element is the board, which has the responsibility for carrying out the legislative responsibilities, and it's advised by the staff.

So, when people say that there should be a review of the Reserve Bank, I'm not sure what they're calling for—a review of the legislation, the mandate, the way the government appoints people to the board, the type of people they put on the board, or how we've done our job; we haven't done our job effectively. All those things get conflated. What I'm responsible for is how we do our job, and the monetary policy regime that we employ. And I would observe that these various reviews that have been done by other central banks have all come to the conclusion that flexible inflation targeting is the best monetary policy regime that we can have at the moment.

Australia was one of the first, if not the first, to adopt a flexible inflation targeting regime. As people have looked to how inflation targeting has worked, people have moved more towards that, which I take as encouraging. There are always going to be debates about the specifics of the particular regime—how you do things—and lots of different systems can work. We keep on top of those debates. But really the big-picture thing is that, while flexible inflation targeting for the world we're living in has faults, it's the best regime that anyone can come up with at the moment. Ultimately you mightn't like the decisions that my board makes, and your committee holds us to account there. I just wonder, when people want a review, what they actually want to review—other than that they're not happy with the decisions we're making.

Dr LEIGH: Well, given that many other central banks are conducting reviews, it seems that a central bank that has missed its inflation target for most of the past five years ought to welcome such a review. But let me take you to a transparency issue, which is an issue that we've come back to repeatedly in these hearings. In February Ian Harper, one of the board members, said:

So at the end of the day, we have our discussion and then there's a vote. And it's not always unanimous, let's just put it that way.

Do you think that if you actually reflected dissent in the board minutes—as, for example, the High Court does in its judgements—then you might have prevented some of the policy errors that have led to five or more years of missing your inflation target?

Mr Lowe : No, I don't think writing the minutes differently would have made any difference, really, to the actual outcomes. What's important to the outcomes are discussions we have at our meetings. We've got nine independent people coming to those meetings asking questions and bringing their own perspectives, and it's the interactions that we have at the meetings that will influence decisions, not how a document is written or not. And I'd have to say that all the issues that we grapple with in the meetings are the ones that I talk about publicly, including today. I talked about the logic of why we didn't step back, why we didn't go with the $5 billion a week rather than the $4 billion. I try to be as open and transparent as I can about all these issues. I don't think writing a document in a different way would have any effect on that.

Dr LEIGH: I pressed you at our last hearing about the lack of monetary policy expertise on your board and asked you whether you've asked for any additional representatives from unions or the social sector. You replied, 'I'm not in the business of asking the government to appoint people to my board.' Bearing in mind the chair's opening comments about the way in which misleading testimony to this committee can be regarded as contempt of parliament, how was your answer consistent with your email of March 2018 to Treasury Secretary John Fraser where you said:

Having somebody from Queensland would also broaden our geographical diversity. We have spent some time trying to identify such candidates but have had limited success so far. I was wondering how you were going. We should discuss on Tuesday morning as time is limited.

Mr Lowe : I think my two answers are perfectly consistent and truthful. The process that we have is one where there's a list of candidates maintained by the Treasury Secretary and the governor of the bank, and that arrangement is set out in a statement on the conduct of monetary policy. John Fraser was the Treasury Secretary and now it's Steven Kennedy. He and I talk about people who could be on that list. I don't request the government appoint anyone from that list. I maintain, as the Treasurer has asked me to do, a list of people with Steven, and then it's entirely up to the government whether they choose people from that list and whom they choose.

Dr LEIGH: In that light, have you asked for any additional representation from unions or the social sector? You've clearly focused on an industry dimension and a geographic dimension. Why wouldn't you also have, as part of that conversation, a discussion about the backgrounds of the persons coming in?

Mr Lowe : We have a lot of discussions with the Treasurer about the people who could be on that list. I'm not going to divulge who's on that list. It's a list of eminent Australians who I think—and the Treasurer would agree—would make a great contribution to the Reserve Bank board. The last two appointments reflect that—they're incredibly well credentialed people coming to the Reserve Bank board. There is a whole lot of discussion going on about who should be on that list, and ultimately it's up to the government. But I do not ask the government to appoint people to the board. That's not my job and nor should it be. I maintain a list of eminent candidates.

Dr LEIGH: You've spoken about the importance of generating materially higher wages growth, and in your opening statement you criticised a business mindset that's focused on cost control. Isn't it true that in some recent years the starting pay of graduates at the Reserve Bank has been reduced? And isn't it also true that discussions of salaries are discouraged within the Reserve Bank, with some people referencing the RBA code of conduct?

Mr Lowe : Maybe you could elaborate. Neither of those observations strike any resonance with me at all.

Dr Debelle : The graduate salaries haven't been reduced. Our graduates' packages have not been reduced over the period, to the best of my knowledge.

Dr LEIGH: Have graduate starting salaries always increased year on year?

Dr Debelle : Yes, the package has. They get a health benefit as well, which they're able to cash out. Taking account of that, yes.

Dr LEIGH: And the discussion of pay, is that discouraged within the Reserve Bank? We know that so-called pay secrecy clauses can put downward pressure on wages, and they've also been said to have gender equity problems.

Dr Debelle : I don't think we have pay secrecy clauses.

Dr LEIGH: So you're very comfortable with Reserve Bank staff discussing their salaries with one another?

Mr Lowe : If that's what they want—it's a free country. I don't mind what people talk about with one another. If they want to talk about that, that's perfectly fine. I think the staff know my view on wages. I would like to have faster wage increases for the country as a whole and for my own staff. I have been very public about that. We are currently undertaking an enterprise agreement discussion, which is complicated, as you can imagine, given that is my view. I am also endeavouring, as best I can, to abide by the government's workplace bargaining policy. I thought that might be where you were going, but the idea of trying to keep secrets from our staff around pay and reducing pay is so alien. That's why when you asked the question I was a bit taken aback, because it is so alien to my way of thinking.

Dr LEIGH: I am pleased about that and so will those who have spoken to me about the issue. You said in a speech on immigration and wages that hiring in a global labour market can 'dilute incentive for businesses to train workers to do the required job.' I was a little disappointed in that speech that you didn't bring new RBA analysis or facts to the question. I want to know how the shifts in Australia's migration policy framework have been incorporated in how the RBA conducts monetary policy?

Mr Lowe : I think it is really a simple matter of logic. I see it even in our own business. If you need workers with particular skills and you can't find them, you have two choices: you can either train them or you can go overseas to find them. To the extent that you can go overseas to find them then your incentive to train them is less. I think that is the reality.

I know in our own operations a number of people who are working for the Reserve Bank have come from overseas, either directly or are first-generation migrants, with really great skills. That has been, as I said in response to the Chair's question before, to the country's great advantage. But I think it does have this effect, in some areas, of diluting the incentive to train. I don't have any research on what that incentive is. I was really talking about a matter of logic here. My observation is that this has happened. When I talk to businesses about it, when they complain that it is hard to get workers, I say, 'Well, why don't you train some up?' It's not that migration is bad or anything—as I said before, immigration is fantastic—but you have to look at the whole picture. All I encourage people to do is have a nuanced consideration of these things.

Dr LEIGH: But doesn't it then flow through? You have a role as a public advocate, but in your day job of conducting monetary policy, wouldn't it follow then that changes we've seen in the migration mix would mean that there is more spare capacity in the labour market due to flatter supply curves and therefore more room to stimulate demand without risking an inflation breakout?

Mr Lowe : I agree with you. I raised those issues in the speech last month in the context of trying to understand why it is that wage growth has been so weak for five or six years, at the same time that demand for labour has been very, very strong. On average, over the last five years, we've generated more jobs in Australia than we thought we would, and wage growth on average has been weaker, so I'm trying to understand why that's the case. We were talking about reviews before. We have done a lot of work internally trying to understand that, and the conclusion that we've reached is the one that you just very clearly articulated—that the supply curve is flatter when you can access foreign workers, and that means the domestic economy can grow more without putting upward pressure on wages and inflation. We are responding to that now with our monetary policy decisions.

Dr LEIGH: Which are still far too timid, in my view. I have been critical of your view to taper QE and to shy away from negative rates. But to move to a question of distribution, Bank for International Settlements analysis looked at the share of speeches made by central bankers that mention inequality and found that in recent years, six to seven per cent of central bank speeches mention inequality. I asked the Parliamentary Library to do the same analysis of your speeches. They said that, of the governor's 101 speeches, just two mentioned either inequality or the distributional consequences of monetary policy. Why are you relatively less interested in inequality than your central bank peers?

Mr Lowe : I wouldn't draw that conclusion from those statistics. We talk a lot, internally and in the board, about the effects of our policies on both wealth and income distribution. An observation I've made at this committee before is that our best contribution to income inequality is to get people into jobs and to have their wages rising. We talk about that a lot. I might choose to phrase it in a slightly different way to some of my peers, but I wouldn't draw the conclusion that the focus is any different. We're really doing whatever we can to get as many people into jobs and to have their incomes grow more quickly. That's the best solution. That's our best contribution to income inequality, and that's core to what we're doing.

Dr LEIGH: Governor, you said in February, when I asked you about the Federal Reserve's new policy of overshooting the inflation target in response to periods of undershooting, that you hadn't given much thought to it. I want to take you back to that question again and ask you how many years of undershooting your target would it take before, finally, you would consider making up for lost ground with a higher rate of inflation?

Mr Lowe : Again, the board has not formally considered that issue. We're trying to get inflation back into the two to three per cent range. What I said this morning was: it's not going to be enough for us just to sneak across the line. We're not going to get inflation to 2.1 or 2.2 per cent for a quarter and then say 'job done'. We want to make sure that it's clearly on track to at least get to 2½ per cent, and I think that approach carries the likelihood that, for a while, inflation will be higher than 2½ per cent. If it's higher than three for a period of time, that's going to be okay as well, provided that it comes down.

At the moment, really our focus is on getting people into jobs and getting wages growth up. When the day comes that we're close to two per cent, we'll rightly turn to the issues that you're raising now and we'll be clear publicly. But, at the moment, I want to assure you that once we get to 2.1 per cent we're not going to say 'job done', and that does carry the risk—or the opportunity, maybe—that inflation will be higher than 2½ per cent and maybe even three per cent for a while. That's beyond my term as governor, but, as an individual citizen, I'd be perfectly comfortable with that.

CHAIR: Thank you, Deputy Chair. Ms Hammond.

Ms HAMMOND: Thank you, Mr Lowe. I want to start with a quote from a speech Dr Ellis gave earlier this year, when she made this statement:

Forecasting in this environment is inevitably an exercise in humility.

I thought that was a very apt statement. Linking it to your presentation today, you mentioned that you and the board do scenario building, and you consider a number of different scenarios. I think you mentioned upsides and downsides, vaccine hesitancy and, potentially, a new strain that is vaccine resistant. In that context of scenario building, have you and the board examined the Doherty Institute modelling, the four-part plan for the opening up of Australia and Operation COVID Shield? Do they get factored into your scenario building?

Mr Lowe : Perhaps, as you prefaced your remarks with Luci's quote, I can hand to Luci. She's closer to the scenarios than I am.

Dr Ellis : I've read both the Grattan report and—I have to admit—most of the Doherty report; I haven't had time to finish reading all of the technical appendices. I wouldn't say we're calibrating our forecasts and our scenarios exactly on the specific hurdles that either of those two reports set, but I would say that the way we characterise our scenarios is broadly in keeping with them. So the baseline scenario, the central scenario, is predicated on enough people being vaccinated by the end of this quarter and into next quarter so that you aren't going to see more really long lockdowns into the December quarter and into next year.

The downside scenario is predicated on a situation where, for whatever reason, whether that's insufficient vaccination or some other reason, you do end up with more outbreaks and more very long lockdowns. So imagine further multiple-month lockdowns in either or both of the two biggest cities. The upside scenario is where we do get it together, where we all do manage to ramp up vaccinations and also that we just don't have further outbreaks. There have been many, many leakages from our quarantine system over recent months. Not all of them have resulted in a major outbreak. You may recall there was another Delta leak in Sydney a few months ago where a gentleman went to every barbecue store in Sydney, and the only person he passed it on to was his wife. This is a very asymmetric virus; not everybody will pass it on. So the RFs that people are talking about are an average, and there is a lot of distribution.

One of the things I got from both of those studies is that modelling is also an exercise in humility, and the actual outcomes are going to be very dependant on vaccinations, and it's really important that the vaccination rollout does continue to accelerate, as it has done lately; but, also, it could just be the luck of the draw of how many more leakages we get from our quarantine system.

Ms HAMMOND: So with the central forecast that you've settled on, would you say that is built on assumptions that we do hit 70 or 80 per cent vaccination by the end of this year and that we don't have any longer term lockdowns and that there is not a new strain that is entirely vaccine resistant? Is that what your forecasting central model is based on?

Dr Ellis : That's correct. Whether it's 70 per cent, 80 per cent—I note that a number of countries have actually had quite good results and have been able to open up, without a major increase in hospitalisations and deaths, with the total population being about 50 per cent vaccinated—for example, countries like the UK or Chile. There are countries where you've seen case numbers come back down again. So whether it's 50, 70, 80 per cent, we haven't been explicit. But the way we've characterised our baseline scenario is that, under the baseline, there are still some lockdowns—we've allowed for a bit more in the current episode; we've allowed for short lockdowns through the December quarter and into the new year, but they're short and things bounce back quickly. If there was to be a fully vaccine resistant strain—that's not specifically how we've modelled the downside, but the way you map the pandemic into the economy is how big and how long are your lockdowns. That's really how you map this into an economic scenario.

Ms HAMMOND: So just in this context, the Treasury provided its modelling of the economic impacts of the Doherty institute modelling on Tuesday. In contrast to the comments I think the Governor made earlier, where bounce backs would be quick, Treasury seems to state that the bounce would be a lot more gradual than a quick bounce back. What's the reason for the differing views here?

Dr Ellis : I haven't actually had an opportunity to have a conversation with Treasury about that distinction. The point we would make is that the main element—so our judgement that spending bounces back quickly is based on actual data, including in Australia but also overseas, that things bounce back quickly and that they've actually overshot expectations. Many countries that have been coming out of lockdowns have found that things have come back faster than they might have expected. This isn't like a demand shock. This is people who were prevented from being able to spend who are now going to be able to do so again. They get to go and do things that they like doing, like going to restaurants and having haircuts and seeing their friends and family, and so they go and do it. They do come back to that behaviour very quickly once it is safe to do so and they're permitted to do so.

Ms HAMMOND: Just within that context: I think it's interesting that we've only had just a bit over a year of the virus at the moment and, as you said, forecasting is an exercise in future humility. Isn't it possible, the longer this goes on, that people's behaviours—such as their purchasing behaviours—will become more subdued? I certainly think that the majority of Australians thought at the end of 2020 that the virus was going to be gone and things would be back to normal by this time of this year—people were planning trips overseas. Isn't there a potential that our economic behaviour will be subdued for longer the longer this goes on?

Dr Ellis : I take your point that some things will be different, in particular the shift to online sales. There'll be reduced business travel and we'll all be doing videoconferencing. There are some things that have changed in an ongoing way—I completely agree with that. The major element of the economic impact and the thing that causes people to lose jobs is that lockdowns prevent people from spending on ordinary consumption activities that they would like to do again. People will start going back to restaurants, they'll start seeing their friends and they'll start going to shops again—so retail spending—and we've seen this multiple times.

I can see that there's a risk as long as incomes aren't maintained. The lesson from the first lockdown last year, the Victorian lockdown last year and all of the subsequent lockdowns around the country has been that spending on retail items goes back very quickly. When I said that forecasting was an exercise in future humility, we haven't been looking at Phil's coffee mug; we've been consistently too pessimistic about how quickly things have bounced back. If we go back to the forecast we published ahead of our last appearance in February, we were still expecting unemployment to be well above what it is now, or what it was in June.

Ms HAMMOND: Yes. I don't want to labour the point, but it's about economic historians looking back at periods post the great crash or either of the wars—at consumer behaviour; our behaviours and the longer term impact on those behaviours.

I want to pick up on something else, though. Let's talk about the worst case scenario: not enough Australians get vaccinated, or a new strain comes out or lockdowns go on forever—I'm not suggesting that, please, state governments! What else do you have in your arsenal of unconventional monetary policy? And are we at risk of a double-dip recession?

Mr Lowe : I agree with you very much on the comments you made before. It's hard to know what our collective psychology is going to be like after we come out of it, and let's hope that we come out of this towards the end of the year. It's possible that we'll become more risk averse because we'll think, 'Well, this could happen again,' and we'll tighten up our belts. We don't know that. As Luci said, the evidence experience so far is that it doesn't happen, but the longer this goes on and the more repeated it is we can't rule out some collective shock psychology.

On the risk of a double-dip recession: as I said in response to the chair's question earlier, I think the probability is quite low and that as more of us get vaccinated over the months ahead there'll be some opening up. We just need at least some little bit of opening up by the time we get to October, November, December to have more economic activity than we're having right now. So it's quite unlikely, given the vaccinations, that October, November, December will be worse than July, August and September.

Ms HAMMOND: Yes. Just in that—

Mr Lowe : I think that—

Ms HAMMOND: Sorry—just picking up on the other part of that question: what other unconventional monetary tools or options do you have?

Mr Lowe : We're pretty much using them all. We could undertake additional bond purchases. We're talking about $4 billion or $5 billion a week and we could increase that even further, although at some point there's a limit to how much we can do of that. It's also possible that we could buy other private sector assets. Some central banks have done that; they've bought corporate securities, or mortgage-backed securities or asset-backed securities to further increase the size of the central bank balance sheets. I don't think we need to do that, and the probability of us doing it is quite low. But, at least in concept, it is possible and some other central banks have done that.

Ms HAMMOND: So you would be a strong supporter of encouraging people to get vaccinated, I take it?

Mr Lowe : A hundred per cent. I've had my first AstraZeneca. I'm getting my second one in two weeks time and—

Ms HAMMOND: I'm a double-AZ.

Mr Lowe : I'm looking forward to that. I think Guy had his second one earlier this week and my other colleagues are all waiting on their second ones as well. I've let all my staff know I've had the AstraZeneca and I'm encouraging them to do the same.

Ms HAMMOND: Excellent. My final question is actually a little bit more random, or it's probably economics 101. I was reading a number of speeches that you all have made and I know that we're focusing on attempting to keep our exchange rate low at the moment. Is that correct?

Mr Lowe : I wouldn't say we're attempting to keep the exchange rate low. I acknowledge, though, that one of the channels through which monetary policy works is keeping the exchange rate low, and we welcome that. We don't have an exchange rate target. I'm not setting out to say, 'Gee, we've got to get a lower exchange rate.' It's more working through the monetary stimulus keeping the exchange rate low. The lower exchange rate means more jobs and a bit more inflation, and we need both.

Ms HAMMOND: In that context, I'm assuming that other countries would have the same objective to keep their dollar or their currency low so that they create more jobs. How do the central banks then interact in the international context, if we're all trying to do that? Are we all deploying similar sorts of tactics, and is it a no-win game at the end?

Mr Lowe : As you said, it's almost economics 101, but actually it's a very insightful question. It's something that I think we've talked about at previous hearings and I talk about this with my colleagues and the other governors of the central banks. If we're all doing the same thing then we don't really get any exchange rate effect if we're all doing quantitative easing. This is one of the reasons that we've had to purchase government bonds, not just that we were short of achieving our objectives, as Andrew reminds us. But, if other central banks are doing this and we're not, our exchange rate goes up and it means fewer jobs and less inflation. So, if everyone's doing it, you've got to do it as well. Some people don't like that, but that's—

Ms HAMMOND: Peer pressure.

Mr Lowe : The economic reality is, if everyone's doing this and you're not, your exchange rate goes up and that's unhelpful. You've got to be doing what the others are doing, and this is why—as I think I said at the previous hearing—one of the considerations that we're paying close attention to in our decisions on bond purchases is what other central banks are doing.

Ms HAMMOND: Thank you.

Mr Lowe : I'm certainly not targeting the exchange rate, but we don't want our exchange rate to go up either.

CHAIR: We want to be competitive and reflective of the state of the economy in the interests of the welfare of the people of Australia. Is that right?

Mr Lowe : Indeed, well said.

CHAIR: Very good. Maybe I've got another career ahead of me.

Proceedings suspended from 10:48 to 11:00

CHAIR: I will resume this hearing of the House of Representatives Standing Committee on Economics into the Reserve Bank of Australia's annual report. I understand, Governor, you wish to make an addition to your earlier remarks.

Mr Lowe : I just want to clarify the answer I gave to the deputy chair's question about remuneration at the Reserve Bank. During the break, I was informed that some of the employment contracts do include a clause that says that you must keep the terms of the agreement and any subsequent amendments confidential. From my individual perspective, people should be free to talk about their remuneration with their colleagues, so I'm going to go back and look at why we have that clause. It's so alien to me to say that you can't talk about the employment relationship with your peers.

Dr LEIGH: Will you now, on the record, make clear to those employees that you wouldn't be enforcing that clause, that, if they were to speak about their remuneration, that would have no impact on their employment?

Mr Lowe : I certainly will. I send a weekly email to all the staff at the Reserve Bank saying what I've been doing during the week, and I'll include this issue in my email this afternoon. The HR department tells me that the motivation for the clause is to preserve the confidentiality of contractual terms between the employee and the employer and that it is a standard kind of clause in many contracts, but openness and transparency about these things serves us all well, so—

Dr LEIGH: We've achieved something today!

Mr Lowe : Thank you for bringing that to my attention. I didn't know we had that clause, so thank you.

CHAIR: I don't consider this a very bizarre example of a clause, but anyway. Ms Murphy.

Ms MURPHY: Good morning, everyone, and thank you for attending today. Governor, I might just ask you a question following from what you just answered about pay security clauses, because it's one of the areas I'm interested in, which probably won't shock people who know me. There's a bit of research about pay security clauses and the way they contribute, particularly, to the gender pay gap. Pay transparency is a policy that my party has and that many labour market economists and others have put forward in order to address a gender pay gap. If we look at the finance sector, it has one of the highest gender pay gaps, at about 27½ per cent for total remuneration, compared to a general gap of about 20.8 per cent, and the base salary gap is about 21.2 per cent, compared to a general gap of about 15 per cent. The figures may have changed slightly since I looked them up, but they're around that number. My understanding is that the RBA is exempt from data reporting to WGEA, the Workplace Gender Equality Agency. I'm sure that's not the RBA's fault. It's probably how the legislation was drafted. But I'm wondering whether you would consider looking at the sort of data that other institutions or other companies do report to WGEA about the gender pay gap and then the RBA voluntarily publishing that sort of data, which you would understand is de-identified for employees, as another way of looking at dealing with the gender pay gap. We don't know at the moment what the gender pay gap is in the RBA, but one might assume from the statistics I just quoted and the fact that there were some pay transparency clauses that it perhaps isn't as good as it should be.

Mr Lowe : I'll hand the floor to Guy in a minute, but I don't know whether we report this or not, so—

Dr Debelle : We do.

Ms MURPHY: Thank you, Dr Debelle.

Dr Debelle : I'm not familiar with the body you just talked about, but we put it out to our staff each year and, I think, in our annual report, which I will just confirm.

Ms MURPHY: That's okay. That may or may not be reported to WGEA. It is the Workplace Gender Employment Agency. It's a statutory organisation, so it will be easy enough for you to find. You don't have to answer now, but I would appreciate it, Governor and Dr Debelle, if you would look at whether the RBA publishes the sort of data that WGEA gets from other organisations and, if not, if you would look at doing that.

Mr Lowe : We certainly will do that. Certainly there's a strong case for us to be as transparent as we possibly can be. I can assure you we've done a lot of internal analysis. We've done this with an econometric model. We've looked at people's salaries, controls, experiences, qualifications and whether they have had breaks for part-time work or parental leave. We can estimate each of these effects within an inch of their lives, as you can imagine. We understand there is still a gap, and all the controls that we can come up with in the econometric models don't explain that gap.

Ms MURPHY: Econometric models don't explain everything—are you sure!

Mr Lowe : Let me put it another way. There does seem to be some gender element to it and we are doing further work to understand that. We've shared much of this work with the staff, haven't we?

Dr Debelle : Yes.

Mr Lowe : The model is well known. The research people share it. So there is a lot of visibility of this in the organisation and, incrementally, we are lowering the unexplained part.

Ms MURPHY: I appreciate that. I know I have asked questions about employment of women at executive levels before, but the research would certainly also suggest public transparency about that is needed. I know that sharing with staff is semi-public, but it's not quite the same as all the data being public. I appreciate you looking into that. If the Reserve Bank is really flying the flag for reducing the gender pay gap in the finance sector then I think you should fly your flag higher and make sure that others see it and be the leader in the area.

Mr Lowe : Yes.

Ms MURPHY: I know Ms Hammond suggested she was asking an economics 101 question and I may well be as well, but I noticed in the July board minutes that, when the board was discussing longer term challenges to productivity, it included issues raised in the Intergenerational Report and you referred to Australia's 'economic dynamism'. So my question is: does the bank have a consistent set of measures of economic dynamism that it uses? I for one would find it useful to have that set of measures, and I suspect it would also help the public debate.

Mr Lowe : Do we have a consistent set of measures? I know there are things we look at—the rate of new firms that are being formed at any particular point in time, spending on research and development as a share of the economy and the number of people who are changing jobs voluntarily. They are three points I can point to straightaway. Luci, are there other elements that you can point to?

Dr Ellis : They are the main ones. This is something that is an area of active research at the moment, but certainly you can look at things like firms that are adopting new technologies, adopting new products and adopting new business models. We use our liaison program as well to gain insights into how firms are changing their business models and we use household surveys to gain insights into how households are changing in terms of their interest in starting up businesses and whether there is difficulty in starting up businesses or evolving the businesses that they are in. I wouldn't say that we have a single dashboard. It is an area of current research. Certainly there is a range of different things. We hope to be able to provide more analysis as it is a continuing program of work.

Ms MURPHY: So when one reads the board minutes and there is a reference to Australia's economic dynamism, it's not possible to look at a dashboard and say, 'This is what the Reserve Bank means by that'?

Dr Ellis : No, not at this stage. Maybe we could get to that point at some point. The world is too complex to really reduce it entirely to a dashboard. But these are the sorts of things we're looking at. I think one of the things that's become possible recently that was not possible a few years ago is looking at things like the BLADE database, where you have a longitudinal view of different companies through time and how they're behaving. That's how you learn more about their balance sheets, about the ways they're financing themselves, the kinds of industries that they're in, the number of new firms and how new firms grow. There is a range of papers that we've already published on topics related to this, and there's certainly an ongoing program of work. We're always learning something new about the economy, and this is one area.

Ms MURPHY: I'm learning something new about the economy every day. We're all supposed to learn, aren't we? Isn't that the point?

Dr Ellis : Exactly.

Ms MURPHY: Look, I appreciate that, and I'm not suggesting an additional burden of work for the bank. But it does occur to me that when the bank, in the minutes, refers to something like economic dynamism it would be helpful if there was even just an asterisk pointing out 'Look at this part of the Reserve Bank's research', or website, for factors of economic dynamism that are generally considered—for example. I think that would be of assistance to the public debate.

Dr Ellis : I get it. I think that's a really good point. We don't put footnotes in the minutes. I was actually planning to give a speech about some of this work later in the year—

Ms MURPHY: Terrific.

Dr Ellis : Hopefully that will be another vehicle for that. But as the staff complete their papers we certainly put them out in the public domain.

Ms MURPHY: Thank you very much. Feel free, in your speech, to say, 'As the member for Dunkley suggested'! That would help me promote your speech greatly.

Dr Ellis : We do have a little 'thank you' footnote in all of our speeches, so I will make sure that we put that in there!

Ms MURPHY: The minutes also looked at labour markets—and you've discussed this a bit, Governor, this morning, and in your opening statement you referred in part, when you were talking about wages and wages growth, to the contribution of underemployment, and in answer to some of the questions from my colleagues. I'm interested in generally the bank's view on insecure work, of which I think you could say underemployment is an element. If we look around the world, I think other countries are pretty aggressive or advanced in their concerns about people's skills and developing people's skills, particularly underrepresented groups in labour markets—women, older people, lower-skilled groups and often, sadly, First Nations people. The OECD Economic Survey of the Netherlands, launched recently—with Mathias Cormann involved; he is now a champion of a number of issues that perhaps we hadn't seen him champion before—sort of looked at this area. I'm not asking you to critique government policy or anything like that, but I am interested to know whether the bank is proactively looking at alternative skills policies to support those who are left behind in the labour market or to deal with that insecure nature of underemployment.

Mr Lowe : To answer your question directly, we're not looking at specific skills policies, because that's not our area of responsibility or expertise. But I want to agree 100 per cent with you about the importance of skills development. One of my hopes is that the tighter labour market leads not just to bigger wage increases, on average, but also a greater incentive for firms to skill up workers. When there are plenty of workers around, the incentive to train people is not as strong as it is when it's hard to find workers. What you see in tight labour markets is that firms decide that they have to develop their own people more.

Ms MURPHY: It would seem, though, that leaving it to the labour market alone isn't working. That's why you said in your introduction that other countries, or institutions around the world, are not leaving it to that hope of a tightening labour market leading to firms' investment in skills. That's why I asked—knowing that it's not your responsibility, but asking whether the bank has a view on it—given that link between underemployment, insecure work and wages that there's been a bit of attention on today from the perspective, I guess, more of immigration. But I'm interested in it from the perspective of upskilling workers.

Mr Lowe : It's hugely important. I was just relying on the markets. That's the only thing the Reserve Bank can do here. We don't control skills policy. What we do is try and hopefully make sure the labour market is tight enough to give decent wage rises and incentives for firms to skill up people. So that's why I was raising that perspective. I agree with the general principle that, as a country, we need to invest more around our workforce. How best that is done is up to government and business.

Ms MURPHY: You'll diplomatically leave that up to others.

Mr Lowe : Yes.

Ms MURPHY: Thank you, Governor. Thank you, Chair. If I've got any time left I'll cede it to the deputy chair.

CHAIR: Thank you very much. He actually took two minutes over before, so we're now even. Mr Simmonds.

Mr SIMMONDS: Thanks very much, Governor, and everybody else, for being with us this morning. Can I ask about your view around house prices. We've seen increases of 20 per cent plus in places around Australia, including in Brisbane during COVID. As to the central model, does it assume house prices are going to continue to increase or level out or drop slightly?

Mr Lowe : I hesitate to provide a forecast for the housing market, but I think it's quite likely we'll see further increases in the next little while. It's a global story, isn't it? It's not just in Brisbane or Sydney or Melbourne where prices are rising; it's almost in every city around the world, and it's largely because interest rates are low and they're likely to stay low.

Mr SIMMONDS: Are there factors at which the model starts to see them level out? Is it the opening of the international borders so people can spend cash travelling again, or is there a specific criterion that you see changing it?

Mr Lowe : It's hard, because interest rates are keeping pushing prices up, as I just said, but there are now some factors that could start working in the other direction. Population growth, as I talked about before, is the slowest in decades—just half a per cent a year. I think you've got to go back to 1916 to see such slow population growth in Australia. And the rate of new housing construction at the moment is very high. So we're building a lot of houses, or a lot of dwellings, and the population is not growing as quickly, and every day the prices go up it's harder for people to afford. So, ultimately, there's some point at which these things all start equilibrating and the big price rises come to an end, but I'm afraid I can't forecast when that will actually happen.

Mr SIMMONDS: Are you seeing signs that first home owners are struggling to get into the market, or has that not been the feedback from the banks?

Mr Lowe : That has not been the feedback. In fact, we've had record numbers of first home owners getting into the market recently, largely because of various government programs. So there's been incredibly strong demand from first home owners. That's starting to tail off now, but the level is still very high.

Mr SIMMONDS: With the low interest rates and the rising house prices, obviously there's a lot of demand there for the housing market. Are you seeing any signs from the banks of—what term should I use?—flippant or reckless lending or anything along those lines?

Mr Lowe : You're really talking about the lending standards—have the lending standards deteriorated?

Mr SIMMONDS: Yes.

Mr Lowe : We don't really see many signs of that. There are some banks which have marginally loosened up, and others have marginally tightened up, but the lending standards that are being applied seem sensible and reasonable. We're not in a situation where we were last decade where almost half the loans in the country were being made without one dollar of principal having to be repaid on a regular basis. These were interest-only loans. And you'll recall last decade there'd been a very dramatic listing in lending standards for investors. So we're not seeing that and we're not seeing the interest-only loans and we're not seeing underwriting standards weaken, which is all positive. If we were to see those things, you could expect APRA would support the Reserve Bank to take some action, but, at the moment, that's not happening.

Mr SIMMONDS: So you're comfortable that, with the demand and with the lower interest rates, the lending settings are still correct?

Mr Lowe : Yes, but at the moment. The issue that we're turning our attention to, through the Council of Financial Regulators, is the sustainability of trends in household borrowing. Over the last year or so, household credit has increased by five or six per cent. That's manageable. The rate of growth is picking up as more loans are approved. So we are now thinking about the circumstances under which some regulatory intervention would be required if lending growth was too strong. I don't really want to see a world where household income is growing at four or five per cent and debt is going at 10, 11, 12 or 13 per cent. You can do that for a little while but I suspect that, if you do it for too long, you build up some medium-term risks. That's not the situation we're in at the moment, but we've got a close eye on it.

Mr SIMMONDS: You've done my pivot for me, Governor. Thank you. What I was going to next was household debt rising faster than household income. So you're keeping a close eye on it. That's good. You said you'd be looking at it in the medium term. Is there a percentage point at which household debt is rising too fast? Is there a time period over which you would want to see the curve start to come down? Can you try and quantify that for us.

Mr Lowe : It's really hard. I don't want to set any particular benchmarks for action here. But certainly if credit growth were to pick up materially from where it is now and it looked like it was going to stay at that high level—it's understandable if it picks up for a while and then the market recalibrates, for the reasons I was talking about before, and then comes down. That would be perfectly reasonable. But let's say we're talking about double-digit credit growth that's sustained for a period of time and income growth running at four or five per cent. That would be problematic in my view, and at some point APRA would be considering interventions.

There are a number of things that we have talked about at the Council of Financial Regulators. The first of these would be to raise the minimum interest rate the banks use when deciding how much they will lend to you. If they raise the minimum rate they use, they will be able to lend less to you. Some countries have done that recently, and I can see a case for doing that if we get in the world that I just talked about.

The other things we have talked about through the Council of Financial Regulators are some portfolio loan to value restrictions, or debt to income restrictions that say no more than X per cent of the loans being made by a bank can have a debt to income ratio above Y. So it's a portfolio restriction, and you can do that on debt to income or loan to value. We're not at the point where those restrictions are needed, but I couldn't rule out that point emerging within the next year. But time will tell.

Mr SIMMONDS: If household debt does continue to rise, is that the extent of the policy interventions that you'd have at your disposal or are there other mechanisms you might employ as well?

Mr Lowe : They're the main regulatory interventions. The minimum rate that's used for loan calculations in these portfolios will our DTI restrictions. Last decade there was a restriction on interest-only loans and the growth of investor credit, you might recall. But that was because lending standards in those particular areas had deteriorated. So they were very targeted to areas where lending standards were weakened. If we saw weakening in lending standards there, you could expect something—maybe not identical but probably similar. But, at the moment, we're not seeing that.

Mr SIMMONDS: That makes sense—in those circumstances, you've targeted those kinds of lending criteria. I know you've spoken a little bit before about the buy-now pay-later sector but in terms of its contribution to household debt it is less regulated and perhaps less reported on or less seen or less visible than other forms of credit. If household debt continued to rise, would you consider a tighter look at that sector?

Mr Lowe : There are reasons to have a look at that sector, but it's not because of the macroeconomic implications of it. The rise in personal debt or buy-now pay-later debt is significant for some individuals but it's not of macroeconomic significance. The vast bulk of household debt in Australia is owed on housing, and that's our focus. That's not to say there aren't legitimate issues in these other areas; it's just that they aren't macro issues.

Mr SIMMONDS: I'll just change tack a little bit. In your discussions with other Reserve Bank governors, internationally, what is the general feel and discussion about the trend in China's GDP growth? We've seen it reduce. Is it the view, internationally, that we're going to continue to see that pre-COVID trend of it reducing downwards?

Mr Lowe : Before COVID, Chinese growth had slowed back to something like five or six per cent. Remember when we had that extraordinary period where it was eight, nine, 10 and 12 per cent? It has slowed, and I think that slowing is permanent. Longer term, China faces demographic challenges, like many other countries. The working-age population is going to stop growing at some point, and that will have an effect on its growth trajectory. Increasingly, it's catching up with other countries in terms of technology. As that happens, growth naturally slows, as well. But the discussion, including with the Chinese central bank, is that growth slows to a lower rate and that is sustainable for quite a while, but in time, as you could imagine, it steps down again as per-capital incomes reach levels that are more commonly seen in newly developed economies.

Mr SIMMONDS: Some economists have said that they expect to see it slow even to two or three per cent in the next few years. Is that your view, or do you see it not going down as far as that?

Mr Lowe : I don't know. That's not my central view. Luci, five to six per cent is probably the baseline for China in our forecasts?

Dr Ellis : That sounds about right, but I'd have to look it up.

Mr Lowe : Having looked at China for about 20 years, I've observed there's always a diversity of opinion. You can find people who are incredibly optimistic, and you can find people who are quite pessimistic about the prospects. Demographics and technology catch-up are important. I think they're the two ultimate drivers of what's going on there. One will work to slow growth in China, and the other—who knows how they'll progress on the technology front.

Mr SIMMONDS: Thanks. That's actually the end of my questions, Chair, so I'm happy to cede my time to Mr Falinski. I know he'll have plenty of questions.

CHAIR: That's a dangerous thing to do! He gets an extra couple of minutes. Dr Mulino.

Dr MULINO: Thanks to you all for attending today to give evidence. I wanted to start with a couple of questions to follow up on the discussion between Ms Hammond and Dr Ellis about some of the modelling. Acknowledging the difficulties of trying to forecast the frequency of lockdowns, going forward, I suppose my questions are really about the inputs, or even a backward-looking examination of lockdowns. What's your estimate of the economic impact of what you might call a strict national lockdown—that you might use as an input?

Dr Ellis : It's a good question, and I'm glad to be able to explain some of the detail behind our forecasting. In the event of a lockdown, our forecasting really is an adding-up exercise, or a subtracting-down exercise. You have to subtract out the bits of consumption that are not available to be spent at that time. You take out all of the international travel, which is about five per cent of pre-pandemic consumption. That's out already at the moment. Then, when you're in a lockdown, there's a roughly 15 per cent drop in consumption. It depends a little bit on exactly what has been shut down. There are all the cafes, restaurants and shops that haven't been able to go online, and recreational services, like going to the theatre, are taken out. That basically takes out about 15 per cent of consumption.

One thing that is a little bit different this time around, compared to the very first lockdown, is that a lot of ancillary health is open this time, so that's a bit of a mitigant. Those things will still be open—optometrists, physiotherapists and so on. That was actually a reasonably big chunk of the declining consumption in the very first lockdown that hasn't been the case in some of the more recent ones.

And, of course, around the world it really just depends on what gets shut down when. This time around construction has been more limited than in our 2020 lockdown. So, yes, it's a subtracting down exercise and that's really how we think about it. We look at the shares of different kinds of activity in the economy and we knock out the bits that are not available to be spent on during lockdown. It just depends on the exact detail of the restrictions.

Dr MULINO: Then, as you said, there are some differences across states. I think that larger portions of construction are shut in New South Wales than are in Victoria, whereas in New South Wales Bunnings is open and it isn't in Victoria.

Dr Ellis : Yes.

Dr MULINO: At a high level, for example, have you estimated the weekly economic impact of the ongoing shutdowns in New South Wales per week and the shutdowns in Victoria? Do you have estimates of those by jurisdiction?

Dr Ellis : Yes, that's exactly how we've done it. Essentially, we've made assumptions about the share of construction that can still be done. For the first two weeks it was a much stricter set of rules, so the decline in construction was much stricter in those first two weeks and then unoccupied residential properties could be worked on. We have literally just gone through the numbers and said that this bit goes down to zero and that bit still continues. It's an adding up or a subtracting down exercise. But, yes—

Dr MULINO: Would you be able to provide those on notice?

Dr Ellis : Yes. In fact, I'm rummaging around for some of the numbers here—could you just hold on? The total for the Sydney lockdown on its own is that it's probably reducing consumption by about a billion dollars a week. Then you have to add in the other states, but I can certainly get back to you—either on notice or shortly.

Dr MULINO: Thank you. Interestingly, you said it was a billion dollars a week for New South Wales. When I look at the Treasury modelling that was released a couple of days ago, they were saying that a strict national lockdown would be about $3.2 billion. So that's very much in accord, in that New South Wales is about a third of the economy.

Dr Ellis : Yes, exactly. I've just found those numbers, with some help. We were assuming that New South Wales construction was at about 35 per cent capacity for two weeks and then at about 80 per cent for four more weeks, so that's the assumption we have in our baseline scenario. It really is that we model the hit to activity based on the restrictions that are in place. Then, when we're thinking about the future and that other lockdowns are possible—and we've allowed for that in our various scenarios—we use a typical shape for the lockdown of about 15 per cent of consumption being knocked out during that period.

Dr MULINO: But, essentially, your modelling is very similar to Treasury's. You probably don't have Treasury's modelling—or you may, in fact, I don't know—but it sounds like it's very similar to Treasury's results.

Dr Ellis : We compare notes on a regular basis. We do the analysis independently and then compare notes.

Dr MULINO: Yes. Then, obviously, the cumulative impact is just going to depend on how long these last.

Dr Ellis : Yes.

Dr MULINO: We had a couple of weeks ago in Victoria and now they have another week. New South Wales looks potentially like going on for quite a while. Do you just add up these—

Dr Ellis : Yes.

Dr MULINO: It's not as simple as that, but in broad terms it's going to get to—

Dr Ellis : In broad terms, that's correct. We've allowed for the New South Wales lockdown to go for a little bit longer than has been announced currently. So our baseline forecast is robust for the Sydney lockdown going for the whole of the September quarter, but not really beyond that. But it's also robust to short lockdowns in the other cities.

Dr MULINO: There are difficulties in scenarios. In effect, you have to come up with a central forecast scenario.

Dr Ellis : Yes.

Dr MULINO: There's another way to think about this—again, I'll go back to the Treasury modelling. They've basically looked at a 50, 60, 70 or 80 per cent threshold and the fact that as you hit each of those thresholds you can then, probably, if your overall strategy is to minimise cases—which seems to be where most governments are and where they think the lowest costs are. Basically, they look at the costs per week of the likely number of lockdowns in that scenario as they hit each of those four thresholds. Have you done any of what we might think of as sensitivity analysis as to the costs of a more slow vaccine rollout and longer time lines in hitting those thresholds?

Dr Ellis : As I mentioned in the context of Ms Hammond's question, we haven't actually gone from a vaccine scenario to an economic outcome. We've really just said, 'Let's assume a certain configuration of lockdowns; this is the economic impact.' What I feel we don't have enough insight into is: at what vaccine threshold or at what event do you have a particular response of the health authorities in particular lockdown decisions? As I mentioned, in the end, if we don't get any more leaks out of our border quarantine arrangements then we don't have to have any more lockdowns beyond the ones we're currently in. It really depends on how many times we seed new cases and how governments respond to low numbers of cases, medium numbers of cases and so on. That's really a public health decision, so we've taken the view that, rather than saying, 'At this level of vaccinations, this will be the response of different state governments,' we'll assume that state governments respond in a particular way. It may be that particular governments make different decisions—you mentioned Bunnings versus construction work—and it may be that different state governments have different decision models for when they go into lockdown, how often and over what number of cases. I don't think we can really predict that.

Dr MULINO: In broad terms it sounds like the model of impacts is very similar to Treasury, as we would hope.

Dr Ellis : Yes, the modelling is broadly in line with what Treasury does, conditional on your assumptions about how many lockdowns you have. But we haven't mapped back to a particular level of vaccination.

Dr MULINO: I have a couple of questions about wages, which have been explored from a few angles. As the governor said, hopefully we're heading towards unemployment in the mid- to low-fours in a couple of years, but it's hard to know what the impact of that will be on wages growth because we're in a different scenario than the 1970s.

Dr Ellis : Yes.

Dr MULINO: One of the trends that we've seen over the last 20 years—and I would say a welcome trend—is rising female workforce participation and rising participation of both men and women aged over 55. They're both good for different reasons, in giving people more opportunities more than for economic reasons. But it's fair to say, isn't it, that there's possibly more to go on both of those trends and that the extent to which both of those trends continue, all other things equal, would make it more difficult to achieve wages growth for a given unemployment rate?

Dr Ellis : I guess what you are saying is how much employment growth you need depends on how quickly labour supply is growing. You're right that there are absolutely trends in participation, and particularly the increasing participation of older workers. I think what's been really interesting in recent times is that Australia has got our participation rate back to the record highs just before the pandemic. But that aggregate is masking the fact that in almost every age group participation has increased even more, but because of the closure of the borders and that fewer migrants, who tend to be younger, are coming, there's been a shift in the population structure towards older people, particularly the over 65s who have low participation. But in every age group participation is still rising.

Dr MULINO: If we'd had this discussion pre COVID, we probably would have been having a discussion around wages growth being more subdued than we would hope and possibly forecast. We'd probably have been saying that participation rate increases in certain groups and older workers, older women perhaps in particular, had been rising faster than we would have expected. Going into a post-COVID environment—and we don't know whether in the middle of next year or when we might be escaping all of its first-order impacts—it's quite likely some of those issues will be present and still having an impact on wages growth.

Dr Ellis : It's something we're very mindful of, but what is interesting is that it's not something that we've seen in other countries. There are a number of countries, but particularly the United States, where the economy is opening up. There are very few restrictions in most places, and they're certainly not going through the kinds of rolling lockdowns and stay-at-home orders that Australia is currently going through. Participation is still lower and part of that is because of school closures. But there does seem to have been a step-change down in participation. So different countries are experiencing different things and it is certainly something we will be watching very carefully.

Dr MULINO: I guess I'm trying to think of the pre-COVID and post-COVID economy, where we will at some point, and getting back to dealing with some of those fundamental drivers. The other interesting one, I think, is underemployment. If we look at the economy in the 1980s or 1990s, underemployment was, I think it's fair to say, systemically lower than unemployment. Unemployment was the focus. In a lot of our attempts to understand wages growth we focused on the level of unemployment. Now, as reflected in your discussion of this in the speech on 8 July but also in many other contexts, you talk about labour underutilisation in a much more holistic sense. I think many other economic commentators are on that page. I look at graph 8 of your speech of 8 July, and underemployment, when looked at on an hour basis rather than a headcount, interestingly is really quite constant over a 30-year period. It just reinforces to me that when we get to the post-COVID economy and we are thinking about how we can start to get more wages growth, it's likely to come back as a structural issue in the labour force, isn't it?

Mr Lowe : Yes, I think you are 100 per cent right. That's one of the reasons I gave that speech on 8 July—to talk about labour supply and how important it is. A third of the workforce is now working part time, which from many perspectives is fantastic because it opens up opportunities for participation that people didn't have when we all had to work either zero or 40 hours a week. So it's a much better world than we were in before, but quite a few of those people working part time, roughly a quarter of them, aren't happy with the hours they have. So when you have a third of the workforce working part time and a quarter of those wanting to work more hours that's quite a big source of additional labour supply that when the economy is doing quite well can be absorbed if these people are happy to work more at the existing wage. If there is more demand for labour then there will be more supply fairly readily. So it's quite an important consideration when thinking about wage dynamics, and that's why I talked about it last month.

Dr MULINO: We all welcome the short-term boost in employment numbers that we'll be seeing once restrictions are lifted. As you have said, this is something we hopefully will see again and something we are seeing in other countries. But when we think about the medium-term economic policies we need to put in place, how we respond to that structural underemployment is going to be critical and as important, in a sense, as the unemployment level.

Mr Lowe : The best solution is strong aggregate demand because that draws in people to the labour force who weren't previously there and it gives more hours to people who are working part time and want more hours. So that's the main solution and the contribution the Reserve Bank can make is to do what we can to support aggregate demand. That's why we are delivering all this monetary stimulus and will continue to do so.

Dr MULINO: Thanks for your evidence.

Mr FALINSKI: The Reserve Bank has copped some criticism about its decision at the July board meeting. What role does the Committed Liquidity Facility play in the thinking of the board around your bond-buying program and quantitative easing?

Dr Debelle : I'm not sure it has any particular linkage. Let me back up. We are assessing—

Mr FALINSKI: Maybe you can describe what the purpose of the Committed Liquidity Facility is, then.

Dr Debelle : Sure. Under the Basel liquidity standards, post financial crisis—12 or 13 years ago—there was a reform effort to make sure that banking systems around the world had better liquidity policies or were more resilient on the liquidity front. So banks were required to hold a certain amount of liquid assets to meet scenarios of liquidity outflows over a 30 day period. One of the main requirements is to hold more government bonds on their balance sheets to meet social liquidity calls. Back in 2008, we didn't have a lot of government debt around. We didn't have anywhere near enough to meet what the Basel liquidity standards required, so we, along with APRA, came up with the Committed Liquidity Facility, which basically means that, for a fee, the banks can obtain liquidity from us, the Reserve Bank—provided they meet certain criteria—in those liquidity events.

In determining the size of the CLF, one of the considerations is: how many government bonds can the banking system hold without causing undue disruption in the market? I suppose, in some sense, the amount of bonds that we, the Reserve Bank, are holding may be relevant to that, but, when we buy a bond—at least, in the first instance—from a bank, we are giving them the ultimate form of liquidity, which is a deposit on our balance sheet. We're immediately translating one into the other. That's why it's not obviously so directly related to it, in my mind at least.

Mr FALINSKI: But you therefore could use that facility to basically inject more liquidity into the banking system, rather than having to buy government bonds directly in the marketplace?

Dr Debelle : Well, the TFF is effectively doing that. The TFF is lending against exactly the same collateral to access liquidity under the CLF. As the governor said earlier, we've provided nearly a couple of hundred billion to the banking system exactly by that mechanism. It's very similar.

Mr FALINSKI: In other words, it's another lever you can pull in terms of creating more monetary stimulus in the economy?

Dr Debelle : Yes, if we felt there were a need to do that. At the moment, we don't see that there's any particular issue with the funding of the banking system—in fact, a long way from it, really.

Mr FALINSKI: I appreciate that. What I'm saying is that there's been a public focus on the quantitative easing program, which is expressed by the governor in terms of the bond purchases the RBA is making, but you could also achieve almost exactly the same outcome through the CLF, as well.

Dr Debelle : Through the TFF, I would say, yes, and indeed—

Mr FALINSKI: Okay.

Dr Debelle : the size of our balance sheet has gone up about $400 billion. It's not miles away from fifty-fifty between those two things at the moment. There are a few more bond purchases than TFF, but they're both of similar orders of magnitude and both have made a material expansion in our balance sheet; that's correct.

Mr FALINSKI: So that hasn't had, necessarily, an impact on your bond buying program then, per se?

Dr Debelle : No. I don't see the direct connection between them. As you said, there are two different arms of policy that we have deployed over the past 18 months.

Mr FALINSKI: Governor, can you give us an update on developments in the least-cost routing and merchant-choice routing sector, in particular the proposed merger between EFTPOS and some of the credit card merchants?

Mr Lowe : Is it okay if I pass the question to Michele? She's much closer to the details, as far as I know.

Mr FALINSKI: Sure. We just want an answer, so that's fine.

Ms Bullock : Firstly, on least-cost routing, you might be aware that we put out preliminary conclusions back in May, in which we talked about how we continue to incentivise dual-network debit cards, which are the basis for least-cost routing. We've had a lot of feedback on that now, which we're considering at the moment. I think it's fair to say that this is pretty challenging area, because least-cost routing is quite easy in a world where we have actual physical debit cards. It becomes much more complicated once we're in a world of mobile payments, Apple Pay, Google Pay and online payments. So we've had a lot of feedback on that. There are a lot of submissions on our website if you want to go and have a look at them, and we're considering those at the moment to see whether or not we need to tweak that. So that's on least cost routing. On the—

Mr FALINSKI: Sorry, can I just interject there just for one second: is this an example of what Matt Comyn's talking about, which is that technology has now got ahead of the regulation? I think both Google Pay and whatever inferior system Apple uses don't allow terminals to actually communicate and drag off different information that allows the terminals to make those intelligent decisions.

Ms Bullock : The way it works once you move into a mobile space becomes technologically more complicated and it gets wrapped up in things called tokens, which I won't go into.

Mr FALINSKI: I've got 15 minutes to kill. Take your time.

Ms Bullock : I wouldn't say it's got ahead of the regulation. In fact, if you go to Apple, the way they put dual-network debit cards on their mobiles is that they have EFTPOS and they have Visa or Mastercard, so they do have both cards on there. The issue is that, once you get into this area with tokens, it becomes much more technically complicated, and it's technically complicated not only for the mobile providers but also for the banks themselves. So in all of this what we've got to do is weigh up the various costs and the various benefits.

The other complication here—and we get a lot of feedback about this as well, which you will read in the submissions—is the consumers—basically you and I. There's a question about whether or not we should be able to choose the payment method rather than the merchant choosing the payment method. So there's actually quite a bit of debate there as well.

Least-cost routing has been very helpful in lowering costs to merchants, as have, I should say, our interchange benchmarks, which directly lower the cost of interchange for merchants, which gets built into their merchant service fees. So there are a number of things going on here: least-cost routing and continued work on keeping interchange fees low. We're assessing at the moment the various arguments for the various costs and benefits of how you might extend this if you can.

Mr FALINSKI: But it is fair to say that, if I pay with my phone, the result of that is that I'm not actually taking advantage of a regulatory regime that more often than not ensures that I get the least-cost route?

Ms Bullock : Well, as a consumer you probably don't care; you just want the payment to go through. It's true that at the moment, if a consumer pays with a mobile, the merchant does not have the opportunity to route it as it likes. That's true at the moment, and the question is how costly and complicated it is to address that.

Mr FALINSKI: Well, with all these things I'm sure the answer is 'very'. Governor, could I ask you about AML and the impact it's having on Australian banks trying to service the South Pacific market?

CHAIR: Well you can. You just ask.

Mr Lowe : You can. Broadly, it's a major issue at the moment. The cost and availability of foreign currency transfers to the South Pacific, in every meeting I have with the South Pacific governors, is the main issue they want to talk about. They don't want to talk about quantitative easing; they want to talk about the cost and availability of—

Mr FALINSKI: They just don't know what fun we have here in Australia, do they?

Mr Lowe : You can understand why. For some of these countries, remittances are equivalent to 30 or 40 per cent of GDP, so the costs of remittances are huge and the channels through which money can be transferred from Australia and New Zealand to the islands are a really major issue. Given the significance, we've had many discussions with the banks about why they can't do better. To summarise their answers: 'Well, it's a risky business. AML is kind of problematic. If we run afoul of the AML guidelines then the penalties, as we know, can be extraordinary.' The banks think there's just not the financial return, relative to the risk they're carrying, in doing this business.

Mr FALINSKI: So what is the implication—

Mr Lowe : Sorry, can I make one other point? The Reserve Bank of Australia and the Reserve Bank of New Zealand are currently working with a number of South Pacific countries in trying to develop an AML utility or a know-your-customer utility to overcome some of these problems. It's hard work, and the banks are very scared of making mistakes on the AML front.

Mr FALINSKI: Maybe that's because we threaten to throw them in prison. What are the implications of us debanking the South Pacific? Who's going to take over from us?

Mr Lowe : I'm not sure who's going to—

CHAIR: The point is there's a void. Who's going to fill the void?

Mr Lowe : There are other banking systems that might step in to fill the void, but there might not be as well. It's a fairly—

Mr FALINSKI: I've been told that, at the moment, there are a number of reasonably large Chinese banks that are beginning to offer services in the South Pacific.

Mr Lowe : I understand that a number are interested. I don't know how far discussions have progressed or whether they will come to fruition or not, but it's certainly possible. These countries are facing the risk of being cut off from an international payment system, and they're looking around for solutions. And they're out [inaudible].

Mr FALINSKI: These are the sorts of regulations that just drive me up the wall. The regulators claim that this helps protect people, and yet, every single place I look, it does the opposite. And now we have a situation where we are effectively debanking some of our most important allies in this region. You may not want to comment on that.

Mr Lowe : I won't comment directly, but, observationally, this is partly coming from international obligations that we have under the FATF framework. We have to meet those international obligations, otherwise Australia more generally will have problems with compliance with the international requirements. The specific issue is how we implement those international requirements in Australia, and I understand there is a parliamentary inquiry into that at the moment. The Reserve Bank is in the process of drafting a submission, and, as part of that submission, we're suggesting, in a different context at least, there's room for modification of the model with whitelisting certain services or creating a safe harbour for those services. Whether that fits in with the current legislative arrangements or AUSTRAC's way of working is yet to be determined, but we are making a submission to that inquiry.

Mr FALINSKI: Yes. You're quite right; we have international obligations. But I think it's fair to say that no other regime seems to result in their banking systems having to abandon other nations because of the risk that has been foisted upon those institutions.

Governor, are you worried, looking forward, that even though government debt at the moment, both at federal and state level, is serviceable, if you were to see a material increase in interest rates globally, would that put us under any pressure in terms of servicing that debt?

Mr Lowe : I'm not worried about that at all. Public debt in Australia has obviously increased. What we're doing at the moment is borrowing against our future income to help support people right now. It's exactly the right thing to do. The level of public debt, whilst it has increased a lot from the very low levels we had previously, is not high by international standards and it's entirely manageable. At some point interest rates will have to rise, and they will rise because the nominal economy is growing better. Hopefully it will grow stronger and, if inflation is a bit higher and interest rates rise, the stronger nominal economy will help pay back the debt in time—or at least stabilise the debt ratio. So, at the moment, I'm not concerned at all about this.

Mr FALINSKI: Great. That's good news. Why are we seeing inflation emerge in other countries, particularly the United States, but not in Australia?

Mr Lowe : The headline inflation rate here is 3.8 per cent, so—

Mr FALINSKI: Fair enough! But it's 5.2 over there.

Mr Lowe : I just thought I'd point that out, before Guy did! In the US, it's interesting. A lot of it's being driven by used-car prices—the CPI in the United States. There's been a very strong demand for cars. People don't want to use public transport. The new-car market has been interrupted by problems in the global supply of chips, because cars are basically run on chips now. So, new cars are in short supply. People want cars to drive, because they don't want to catch public transport, so the demand for second-hand cars in the US has skyrocketed. I think the increase in car prices in the US has been 30 per cent or 40 per cent, and that's having an impact in a couple of other supply chains.

Mr FALINSKI: You'd have to buy bitcoin to get a better return! Governor, we've had a lot of talk today about inequality, and I was just looking at the Productivity Commission's report on inequality in Australia in 2018. There are a number of observations I have made from that. Australia's income inequality over the past few years has actually declined, whereas in countries like Sweden and Finland it's actually increased. Countries that seem to have lowered their company tax rates and reformed industrial relations laws to allow more-direct negotiations between workers and bosses seem to have had a decrease in income inequality. And Thomas Piketty's book on inequality generally in the Western world may have been exaggerated, because most of the asset price increase was in home ownership, and it seems to lead to the fact that you should have a focus on increasing supply in housing. Why are none of those sorts of policy prescriptions talked about in an Australian context?

Mr Lowe : I think a number of them have over the years. There's been political debate about corporate tax. A number of people talk about IR and zoning, and restrictions on housing supply are discussed a lot here. Perhaps I could just use this opportunity to come back to the housing market. There's a lot of discussion at the moment about how low interest rates are contributing to housing prices, and that's global. Almost everywhere in the world at the moment has low interest rates. The level of housing prices is very different in different countries and actually in different cities within Australia, yet we all have the same interest rate. That's because the value of the land that is embedded in the price of each house is very different in different countries.

So, it's really about land values. If we want to do something consistently about housing prices, interest rates aren't the tool to do that. It's affecting the value of the land that's embedded in each dwelling, and the value of the land is affected by the choices we make, as a society, about the urban form, zoning and planning rules, the urban density, the design of our transportation systems and, dare I say, the way we tax land and the way we finance its purchase. If we really are concerned about the level of housing prices, I'd encourage you to think of tools other than interest rates, because in the end, while it affects the cycle, it's not going to make much of a difference. It's really the value of land that's embedded. You created a slight opening, so I thought I'd deliver that lesson!

CHAIR: Well, that's alright, because you'll have the opportunity to make a submission to Mr Falinski's inquiry through his Tax and Revenue Committee! But your time is now up, Mr Falinski. Deputy Chair, you have until 12:19.

Dr LEIGH: Governor, I want to follow up on the question that Mr Falinski raised about Australia's unique Committed Liquidity Facility. My concern isn't about the quantum of the facility but about the fact that a non-trivial share of the facility involves banks holding each other's bonds. It seems to me, if you're concerned about financial stability, that's a recipe for disaster in the event of a crisis. Obviously, I can see why banks like it: it lowers their cost of capital. But what work are you doing to get banks to shift to owning government bonds rather than each other's bonds? Back in 2019, there was an RBA Bulletin piece that said:

The CLF is required due to the low level of government debt in Australia.

That's surely no longer a constraint.

Mr Lowe : Guy?

Dr Debelle : They don't hold each other's bonds; they hold their own self-securitised bonds to access the Committed Liquidity Facility. That's the asset that all the banks have to access the Committed Liquidity Facility—near enough to 100 per cent. So it's their own self-securitised mortgages which sit on their balance sheets, not each other's bonds, for exactly the reason you said: when we designed this, we didn't want them to be holding each other's bonds because of the financial stability risks that you highlighted. So absolutely. That's how we set it up to ensure that doesn't happen. So that isn't the state of affairs.

To go to your second question, which is relevant, we have been increasing the share of government debt that the banking system can hold through time, over the last few years, as the government debt stocks have evolved. We have increased that share both as a percentage of the stock outstanding and also, currently, absolutely, given the rise in the stock. Both of those two things have been increased—I won't get this exactly right—over the last, probably, two or three years. That is something we continue to look at, and the consideration there—which is basically why the CLF exists in the first place—is to ensure that we still have an appropriately functioning government bond market. We didn't want the banking system to own the whole of the government debt and render the market dysfunctional. So that is something that we review and provide to APRA. In the end, APRA makes the assessment of the size of the CLF. We provide them with an assessment as to what a reasonable amount of holdings of government debt, both federal and state, by the banking system can be. Then the other dimension, which APRA reviews or works on with the banks, is what their expected cash outflows are, which also influences the calculation of the CLF.

Dr LEIGH: Thanks for that clarification. Are you getting pushback from the banks about decrease in the size of the CLF, given that there are now plenty of Commonwealth government securities on offer?

Dr Debelle : That's a question you should probably put more to APRA. As I said, APRA has further conversations with the banks on the size of the CLF, not us.

Dr LEIGH: Okay. The Bank for International Settlements has set up two green investment funds as an option for safe, liquid green investments. My understanding is that the European Central Bank has invested and the Reserve Bank of New Zealand has invested, and the Reserve Bank of Australia has very clearly talked about the risks to macroeconomic stability from climate change. Accordingly, has the RBA invested any of Australia's foreign reserves in the Bank of International Settlements green bond funds?

Mr Lowe : Guy, to you.

Dr Debelle : I will have to come back to you on that one, Deputy Chair. I know we're looking at a similar set-up in the Asian region currently, along with our counterparts across the EMEAP region. I will have to come back to you. We can own the green bonds directly; we don't have to go through the BIS investment vehicle. A green bond issued by sovereigns that we invest in, particularly in Europe, is an investable asset in our portfolio. I think the one thing I'd note at the moment, in this market, is that, with these bonds, there is more demand than supply globally at the moment. There's a lot of appetite to invest in such bonds, and at the moment, I would say, there is probably not enough supply to meet that in the end. But, as I said, we can own the bonds directly; we don't need to go via the BIS investment vehicle.

Dr LEIGH: If you could come back to me on that broad issue, I'd be grateful. Governor, I want to take you back to the issue of immigration and wages. There was an interesting suggestion from the Grattan Institute recently that, rather than using occupation lists to select skilled migrants, there be a wage based selection model. That would have the ability to mitigate some of the concerns you raised, wouldn't it?

Mr Lowe : I'm not familiar enough with what a wage based selection model could look like. To the extent that the people who come to Australia bring with them skills that are in short supply that's to the national advantage. How best to design a scheme so that that happens effectively is not my area of competence, but the general point is right.

Dr LEIGH: It goes to the question of where in wage distribution the pressure of immigration comes. Certainly if you look at the extreme, a lot of US migration is lower skilled, putting downward pressure on the wages of cleaners and childcare workers. In Australia if we were to select more rigorously based on expected wages, we could target that pressure higher in the income distribution, could we not?

Mr Lowe : I don't really see it necessarily about the level of wages. I know in recent times in parts of the country there has been a shortage of chefs. I know some chefs get paid a lot, but most don't get paid particularly large amounts. Allowing people to come in with those skills helps domestic business. It's not necessarily the level of wages; it's really where the skills are in shorter supply and where we can't develop those skills domestically quickly enough.

Dr LEIGH: Yes, and that seemed to be some of the points you were making in your speech. Indeed, you were saying that hiring on the global labour market dilutes the incentive for businesses to train workers. The flipside of incentivising businesses to import chefs rather than to train them is that there is less wage pressure among chefs and fewer local chefs that are trained; is that correct?

Mr Lowe : I think that's true. I think a good example I am dealing with at the moment is cybersecurity specialists. There is very strong demand for those in Australia and there is a limited supply. What happens to their wages? They go up. In a world where we could access the global labour market if people could come in with those skills, that would dilute the upward pressure on those people's wages, at least for a period of time. The same is true for chefs, but to a limited degree.

Dr LEIGH: But the argument seems stronger for cybersecurity.

Mr Lowe : Sorry, can I just make one further point? That's dealing with hotspots in the labour market in specific points in time. You have to distinguish that from the effects of immigration on the general level of wages over time. When people can't come in when skills are in short supply, it does affect the wages of the people with those skills domestically.

Dr LEIGH: I would have thought that the argument for immigration is stronger in the case of an occupation where the training pipeline is long, like a cybersecurity specialist, who might require three to five years of training, rather than a chef, who might require one or two years of training. In terms of the timing of your board meetings, does it really make sense to be holding them the day before the national accounts come out?

Mr Lowe : It would be better if we had that information at the time of the meeting. We've discussed with the ABS on various occasions the possibility of earlier release of Australia's national accounts, because we're relatively late in the cycle across other countries. I can't deny that it would be better to have that information, but on the other hand the improvements over time in the availability of data mean that information contained in the national accounts isn't the same as what it once was. We have access to huge sources of data now and we're processing that data effectively within the organisation. That gives us new real-time readings on consumption, building activity and lending, so—

Dr LEIGH: But the work that David Gruen and his team do at the ABS is not trivial, right? The national accounts are pretty important. Yes, one way of not having them come out the day after you is for the ABS to move its schedule. There's another way, which is that you meet a day later and therefore have the benefit of the national accounts in making your decision. Wouldn't that be wise?

Dr Debelle : I would just point out that that isn't costless, given the number of financial contracts which reference the actual date of the thing—that's a consideration. But we've had that kind of conversation with the ABS. I would just note also that a lot of the information which Phil was talking about are innovations that David and the ABS have introduced over the last couple of years in terms of the data that we have.

Mr Lowe : We just have many more timely sources of data. I'm not downplaying the significance of the national accounts—clearly, they're an important record of how we've been doing. But we have a lot more timely data and many of our decisions still look to the future as well, so I don't see a major benefit in switching the timing.

Dr LEIGH: Yes, well, if it's a concern about contracts I would have thought you could at least switch over on some phased schedule which gave everyone certainty.

The issue of house prices has been raised by a couple of my colleagues. According to the ABS's most recent figures, in the quarter to March the mean price of a residential dwelling went up by $39,000. That's almost twice what the average worker earned over that period. In other words, houses are rising in value more than workers are earning. The typical house is earning more by sitting still than the typical worker is earning by working. And yet your research program on housing seems a bit undercooked. You have the occasional research discussion paper but no broader framework in which you set out the bank's views on house prices—the risks, costs and benefits of house prices. Houses are two-thirds of household wealth, and household debt in Australia is among some of the highest in the world. Wouldn't it make sense to have a more formal research program and more considered analysis of house prices?

Mr Lowe : Yes, it's always good to do research—I agree with you. But, ultimately, the main drivers of housing prices over time aren't within our control. As I said before, interest rates are pushing up housing prices—and I know that their influence is global. But, in the end, if the society wants to do something about the overall level of housing prices the solution isn't higher interest rates, is it? If we had higher interest rates now, sure, housing prices perhaps would be lower, but fewer people would have jobs and wages would be lower. That's not an attractive trade-off and it's certainly not one that the Reserve Bank has a mandate to make.

If the society wants to do something about housing prices it's really about the value of the land embedded in your house. We can keep doing research on that, but the tools are not within our hands; they're within the hands of governments. As I said, it's about urban design, planning laws, transportation and taxation. We can do the work on that—we have to keep an eye on it—but I'd rather my staff work on things that directly influence decisions that we can take rather than decisions that others can take.

Dr LEIGH: Finally: if there were to be a COVID outbreak at your head office or business resumption site, have you thought through how you would reorganise the bank's workforce to ensure that your work can continue uninterrupted?

Mr Lowe : We certainly have. At the moment the vast bulk of us are working from home. I'm in the office today, obviously, but most days I'm at home, as are more than 90 per cent of the Reserve Bank's staff. We have red and blue teams who cycle through the various facilities. So we've done a huge amount of preplanning there.

Dr Debelle : I'd also note that we had COVID cases in our site in Craigieburn last year, so we've actually had to deal with this firsthand. This is not a hypothetical; we've actually had to respond accordingly.

Mr Lowe : I'm not saying there wouldn't be challenges here, but, as you could imagine, the risk management committee that I chair has spent a lot of time on this.

CHAIR: Continuing on from that, you've said yourself, Governor, that you've been vaccinated. I've been vaccinated. I'm not asking anyone to out themselves—I believe in medical privacy—unless they want to.

Ms MURPHY: I have.

CHAIR: Ms Murphy has just outed herself. But is the RBA putting any incentive schemes in place and/or tracking the vaccination levels of its staff?

Mr Lowe : We have not done that yet. As I said before, I have encouraged all staff at the Reserve Bank to be vaccinated, and I'm confident that we will have a very high rate of vaccination here. Within the Reserve Bank, there is an incredibly strong sense of doing the right thing by the public. Serving the public interest is the thing that drives us, internally. I think that desire to do the right thing by the public will see most of the staff be vaccinated here. If that turns out not to be right, we'll have to look at other options. But at the moment we haven't.

CHAIR: I assume you're probably right on that one. Are you hearing anything from your business liaison in terms of businesses holding on to existing staff because of tightness in the labour market?

Mr Lowe : That's a very good question, and it's one of the reasons why we're thinking that the unemployment rate won't go too high through the current lockdowns. If we'd been having this hearing a month ago or six weeks ago, we would have been talking mainly about businesses not being able to find workers, people with the right skills, and about the pressures in the labour market. That was the universal story we were hearing through our business liaison program. We're obviously not hearing that now. It's all about the lockdowns. But I know that many businesses are looking forward to the day when the lockdowns are over and they are once again in the position of complaining about not finding workers with the relevant skills. If you're looking forward to that day, then you're more likely to treat your workers well today and you're more likely to keep in contact with them. We're hearing quite a few firms say, 'Look, this will be over—who knows when, but let's say in some months time—and we want these people again.' Businesses have a strong incentive to keep in contact with their workers, and the workers have a strong incentive to keep in contact with the businesses. I'm hoping that two-way self-interest will keep the labour market intact during this period.

CHAIR: Can we quickly go back to the discussion about payment systems. You acknowledged that you had some work to do in this space. Do you collect data directly from companies—Apple, for instance—around payment platforms and the volume and nature of transactions et cetera?

Mr Lowe : I know we've been collecting data from the companies in the buy-now pay-later space. Michele, we don't collect data directly from Apple, do we?

Ms Bullock : No, we don't. You'll remember that Apple itself is not independent of the banks. I think the Commonwealth Bank has provided some information on the proportion of its transactions that goes through Apple and Google.

CHAIR: I accept that point, but you just conceded, Governor, that you collect data on the buy-now pay-later sector, which is entirely reasonable as it's a very competitive sector. But one of the concerns about the digital payments platform sector is that it's less competitive. You've acknowledged you have some work to do. Are you going to seek further information from banks and/or go to all banks to say, 'The Commonwealth Bank has provided us with this information, and we'd like further information from you so it can inform our decision-making'?

Mr Lowe: We could, and we'll make sure that we understand how mobile payments are being made. I'm not quite sure what the best way of getting that information is, but we want to. The deeper issue, though, is that the Reserve Bank does not have the regulatory tools to deal with this issue.

CHAIR: I accept that. But Ms Bullock just said that you could get data from the CBA regarding this issue. So what I'm asking is are you going to other banks and saying the CBA has given you this information, which has helped to inform your position, at least in terms of policy, including if you need to go back to the parliament and say you believe that either you or another entity needs more power to address this? Have you gone, or will you go, to the banks to ask for that?

Ms Bullock : We are always dealing with the banks and asking them for information. Some of them can provide it easily; some of them can't because of their systems issues. We don't necessarily publish everything we ever get from the banks, but we do often go to the banks and ask them for information which can help us. This is one issue where, if we can get it from the banks, it would be helpful in understanding what is going on.

CHAIR: I think you said CBA volunteered that information.

Ms Bullock : No. CBA have been quoted, and provided some information in various public inquiries about their estimates of transactions that go through mobiles. What details they have on it I'm unsure.

CHAIR: It sounds to me like you need to request that data.

Ms Bullock : We need to have a conversation with the banks about what exactly they have and what they could possibly provide us with. We don't know exactly what they have.

CHAIR: From the tone of this conversation, I imagine you're going to do so.

Ms Bullock : It's something we are interested in. I would think we will be asking the banks what they have and whether it is possible to provide this sort of information.

CHAIR: I guess what I'm asking for is an undertaking to this committee that you will do it.

Ms Bullock : Yes, we will be asking the banks what sort of information they have on this.

Mr Lowe : We'll ask them to provide it to us, as we do in lots of other forums. You may hear back from them all these complaints about requests from regulators for data!

CHAIR: We'll have follow-up questions on notice—don't worry, Governor! I have a couple of quick questions before we conclude. Mr Falinski asked questions around the challenges of debanking. You acknowledged that 30 to 40 per cent of countries rely on remittances. Mr Falinski was dancing around the topic. If we engage the in debanking of banks in the Pacific islands, that will mean other interests that may have economic and commercial interests, but also strategic interests, entering into the South Pacific and the Pacific overall, which may not necessarily intersect with our national interest or their national interest or may make them somewhat dependent on the interests of another country. Is that a concern for the Reserve Bank?

Mr Lowe : It could be a concern for the country. It's not our area of responsibility. I would hope that, as a country, we could provide banking services to our friends and neighbours in the South Pacific in an efficient and effective way to help them. As a country, we've got a strong interest in making sure that happens. If we don't do it, surely they will look elsewhere.

CHAIR: This is one of my big concerns. We've had private conversations, and I don't think I'm saying anything out of school here. I'm certainly not going to quote anything from you, Governor. I'm concerned not just in this space but also about issues around central bank digital currency. The traditional silo model of regulator in Australia is that you have financial regulators and then you have security agencies. And then, of course, there are some overlaps: I know that you and APRA do work in this space, particularly around cyber, which involves more than just the silo. Do you think we as a nation have the infrastructure—or the regulators have the capacity and you have the capacity—to address the intersection between national security risks, which can be not just domestic but sometimes our national interests, and the economic advancement space, which can touch on security as well? I know it's a big question. Do you think you have the capacity, the skills and the knowledge, and do we have to look at this?

Mr Lowe : You say it's a big question—and I don't have enough information to answer because I don't know what discussions take place in the various corridors in Canberra. It's worth taking a look at. I'm not sure whether this is something that will come up in the Scott Farrell review of the payments system. Ultimately, this particular one is a payments system issue.

Ms Bullock : Phil, I might just jump in very quickly to say that there is a reasonably large group of agencies, including us and including DFAT and so on, which are holistically attempting to get together to look at this issue. So, there is work going on. And I think agencies do have the capacity to understand where others might have expertise and where we need to fold in. That's an example.

CHAIR: What's the name of that working group?

Ms Bullock : I don't believe there's a particular name. It's just agencies meeting to try to look at issues of de-banking in the Pacific.

CHAIR: I'm not talking solely of de-banking in the Pacific, but generally. But I'm very heartened to hear that, Ms Bullock. Sorry, Governor.

Mr Lowe : The other observation here, particularly on the South Pacific, is that a number of the South Pacific countries would benefit from an increase in their own compliance with AML laws.

CHAIR: I don't think anyone necessarily disagrees with that, but—

Mr Lowe : We can criticise the banks for not providing the services, but because some of the standards being applied in the South Pacific aren't what we might want them to be, the banks are very nervous about it. So, if their standards are not up to the national standards, how do we provide banking service to them? It's a really tricky and deep question.

CHAIR: I don't think people are specifically beating up on the banks, although there's a concern around the burdensome nature of AML. There is a concern, at least on my part, about how our national interest—which ultimately this parliament must seek to advance—is going to be impacted by decisions that come as a direct consequence.

Here is my final question—and this, again, goes back to that point. Mr Falinski made a comment about inflation in Australia, and I've also asked about it. You made the point about where inflation presently sits, but then you said you're not concerned about it. One of the concerns I have is that actually there's a lot more inflation in the market than we are prepared to accept, but it's just into specific areas, particularly in fixed assets, because the huge volume of cash has to go somewhere, so of course we're seeing significant inflation in housing, which traditionally is weighted at a certain rate when we're factoring in inflation. Then of course you've got inflation in equities, because people have nowhere to park their cash, since they get low interest rates, versus consumer goods in the globally traded economy, where there are floating currencies. So, it's very hard to see significant inflation in consumer goods. Do you see that there's a fundamental problem with how we're weighting assessments of inflation, which actually hides the fact that there is quite a lot of inflation in the economy, but it's all in things that we give less weight to than we perhaps should?

Mr Lowe : Well, there is inflation in asset values—

CHAIR: Yes.

Mr Lowe : in some forms of commercial property and equities. And at a very high level we understand why that's happening. It's low interest rates, and low interest rates being sustained for a reasonable period of time and people having some optimism—rightly—that we will come out of the pandemic. That's the world we're in. In terms of goods and services, the CPI captures the whole range of individual goods and services that people buy. Clearly there are some goods whose prices are going up quite quickly. But there are also a lot of goods whose prices have gone down over the past year, and actually there are many goods whose prices have gone down over the past decade. People don't pay that much attention to the fact that the price of the shirt they're wearing is probably no higher than it was a decade ago, and certainly the price of their TV or—

CHAIR: Well, it depends on your tailor, or which shop you go to, Governor! You're in Martin Place in Sydney. I suspect yours is pretty swish!

Mr Lowe : The point is that much of the stuff that you buy in the department stores is no higher in price than it was five years ago, or maybe in some cases 10 years ago. It's easy to forget that. We all have a natural tendency to focus on the prices that have gone up, and at the moment there are quite a few prices that have been going up, partly because of problems in the supply chain. I think fruit and vegetable prices were higher this quarter. We measure the prices of goods and services pretty well in this country. And, as you started out with, asset prices are very high—and rising. That's partly because of low interest rates and optimism that we will get through the pandemic.

CHAIR: Let's take that as a—do you want to hold your mug up again? There you go. That should be on the front page of the newspaper tomorrow.

Mr Lowe : It's not brimming with confidence, I have to say. It's half full, but I think that's where it should be: half full and not spilling over with effervescence.

CHAIR: I will now conclude today's hearings. Thank you for appearing before the committee today. We do appreciate it. We know, obviously, that it's part of your oversight function, so you have to turn up, but the fact that you attend well prepared and in good humour is appreciated. We would rather have you in the flesh, but we know that's not your issue; that's a situation of circumstance. In my experience, I think you want to turn up in the flesh as well. So we appreciate your accommodation. Of course, the committee secretary will be in touch with you in relation to any other matters arising out of today's hearings, and you will be sent a copy of the transcript of your evidence to which you can make corrections of grammar and fact.

Mr Lowe : Thank you very much. I look forward to meeting you in person in six months time.

Resolved that these proceedings be published.

Committee adjourned at 12:36